On June 16, the Luxembourg tax authorities issued long-awaited published regulations (Circulaire du directeur des contributions L.G.-A nr 60 du 16 juin 2014) for the use of functional currency other than Euro for Luxembourg tax purposes by Luxembourg tax payers (the Regulations). The Regulations set forth the conditions to be met by a Luxembourg tax payer to be able to use functional currency as well as the exchange rates to be applied. In addition, the Regulations contain detailed examples explaining the practicalities of the use of a functional currency.
The Regulations are silent on the impact on functional currency agreements made by tax payers with the Luxembourg tax authorities prior to the issuance of the Regulations. It should be determined on a case-by-case basis whether any action is required.
Here below the main points of the Regulations are summarized.
Conditions for use of functional currency
• Any currency of which the exchange rate is determined and published by the European Central Bank can be used as functional currency. These include all the main currencies;
• The Luxembourg tax payer must have its capital denominated in such functional currency and prepare financial statements in such currency;
• A request must be filed with the Luxembourg tax authorities at the latest three months before the first financial year for which it is intended that the functional currency will be applied. For newly established tax payers the request must be filed prior to the end of the intended first financial year. The request should include certain details as further set out in the Regulations;
• The functional currency will remain applicable as long as the tax payer has its capital denominated in such functional currency; and
• All tax payers that are part of a fiscal unity (intégration fiscale) must use the same functional currency as of the first financial year in which the fiscal unity starts.
Calculation of income tax due
• The taxable amount determined in the functional currency will need to be converted into Euro by using the exchange rate as published by the European Central Bank. The Luxembourg tax authorities will continue to determine domestic tax credits, tax assessments and notices in Euro;
• The tax payer needs to make a choice between using the average or the year-end exchange rate for determining its taxable amount for corporate income tax (l’impôt sur le revenu des collectivités) and municipal business tax (l’impôt communal commercial) purposes. A tax payer will be bound to the rate chosen, i.e. average or year-end, for future years; and
• Tax losses, recapture amounts, balance sheet total, etc. are all to be determined in the functional currency. These so-determined amounts are converted into Euro only in the year in which they are used, e.g. loss compensation. The cost basis of shares, relevant for purposes of the Luxembourg participation exemption, needs to be determined at the exchange rate of the day of the acquisition of such shares.
Calculation of net wealth
• For net wealth tax (l’impôt sur la fortune) purposes, the assets and liabilities in functional currency are to be converted into Euro using the exchange rate of the balance sheet closing date prior to the key-date (date-clé) for determining the unitary value, i.e. the rate of December 31. Tax payers with a financial year different from the calendar year can choose to use that same exchange rate, but will be bound by such choice for future years; and
• A reduction of net wealth tax on the basis of paragraph 8a of the net wealth tax act (loi concernant l’impôt sur la fortune) requires forming a provision in the taxpayer’s balance sheet. The amount of the reserve in the functional currency needs to be determined by using the exchange rate of the balance sheet closing date prior to the key-date. If such reserve is distributed in whole or in part, the net wealth tax due as a result thereof is determined by using the balance sheet closing date exchange rate of the year prior to the distribution.
Transition from Euro to the functional currency
• When changing from Euro to the functional currency, a tax payer will have to establish a closing tax balance sheet in Euro in order to convert the Euro amounts into the functional currency amounts. The rate to be used for such conversion is the exchange rate of the closing date of the relevant financial year (the Transition Rate). Tax losses, recapture amounts, etc. will also be converted at the Transition Rate;
• A point of attention when a transition is considered regards loans receivable and loans payable denominated in functional currency. The Regulations prescribe that any exchange difference on such loans are deemed to be realized in the year of transition; and
• The book value of amortizable assets determined by using the Transition Rate will be the basis for determining the amortization.
Please contact your tax advisor at Loyens & Loeff in case of questions or in case you would like to receive more detailed information.