Introduction of new notion of ‘single entity group’
Recently, however, with effect from 1 January 2024, the Luxembourg legislator introduced the concept of ‘single entity group’ and added such group to the list of entities benefiting from an exception to the application of the IDLR.
To qualify as a ‘single entity group’, a taxpayer must meet two cumulative conditions:
- it must not be included in a consolidated group for financial reporting purposes; and
- it must have one or more associated enterprises (and is therefore itself not a ‘standalone entity’) within the meaning of article 164ter(2) LITL (or a permanent establishment located in a state other than Grand Dutchy of Luxembourg) with the caveat that entities that are excluded from a consolidated financial statement due to their small size or insignificant interest are still considered part of a consolidated group for financial accounting purposes.
This means that, for example, a Luxembourg securitization vehicle itself held by a (Dutch) foundation (which is a typical set-up), and which thereby does not qualify as a ‘standalone entity’, can now qualifies as a ‘single entity group’.
As a consequence of being a ‘single entity group’ it may – upon request – fully deduct its exceeding borrowing costs provided that it can demonstrate that its equity-to-total-assets ratio is at least equal to (or greater than) the ration of the group, i.e. the ‘single entity group’. The taxpayer’s ratio is considered equal to the ratio of the ‘single entity group’ if the taxpayer’s ratio is lower than 2%. Whilst the wording of the relevant law provision is not overly clear, it effectively means that as long as the ‘single entity group’ does not itself borrow from associated enterprises (as defined in article 168ter(1)(18) LITL), it should be allowed to deduct all its net borrowing costs without limitation. For the purpose of this rule the threshold to qualify as ‘associated enterprise’ is lowered to 25% (instead of the general 50% threshold relevant for other tax law provisions).
The revised Article 168bis introduces a specific anti-abuse rule, ensuring that an arrangement or series of arrangements put in place to avoid, as a principal objective or as one of the principal objectives, the obligation to increase the amount of group capital for the purposes of determining the SEG ratio are to be disregarded when applying this provision.
These provisions are a welcome addition to the Luxembourg rules on IDLR and are expected to have a positive impact on, a.o., Luxembourg securitization vehicles, bringing the Luxembourg rules in this respect now on par with the rulings applicable in Ireland.
Should you be interested to discuss your particular situation, please feel free to reach out to your usual contact within Tiberghien Luxembourg.
