Luxembourg update: proposed interest deduction limitation at fiscal unity level and reduction of corporate income tax rate

On 5 March 2019, the government filed its 2019 budget bill of law. The proposed tax measures include a reduction of the corporate income tax rate and amendments to the fiscal unity regime.

Reduction of the corporate income tax rate

As from the tax year 2019, the corporate income tax (CIT) rate will be reduced to 17% (currently 18%). This means the consolidated corporate tax rate (including solidarity surcharge and municipal business tax) will decrease from 26.01% to 24.94% for companies with their seat in Luxembourg City. Furthermore, the bill of law proposes to increase the threshold up to which profits are taxed at the reduced CIT rate of 15% from EUR 25,000 to EUR 175,000.

ATAD interest deduction limitation – amendments to the fiscal unity rules

As per 1 January 2019, Luxembourg implemented the EU anti-tax avoidance directive (ATAD) into domestic law and introduced interest deduction limitation Rules (the IDL Rules). These rules cap the deductibility of so-called “exceeding borrowing costs” (i.e., the positive difference between borrowing costs and interest income) at the highest of 30% of the EBITDA or EUR 3 million. The implementation law did not offer the option to apply the IDL Rules at fiscal unity level. As announced earlier, taxpayers will now be given the possibility to do so.

To this end, the 2019 budget bill of law proposes that the limitations included in the IDL Rules be correspondingly applied and determined at the level of the fiscal unity. This measure would have retroactive effect as from 1 January 2019. Taxpayers in a fiscal unity would have the option to maintain the application of the IDL Rules at individual entity level. The choice would be binding for the whole duration of the fiscal unity.

Finally, the bill of law provides for some clarifications concerning the possibility to reduce the tax liability at fiscal unity level by using donations, losses and tax credits accrued either before or during the tax consolidation period.

Next steps

The bill of law will now go through the parliamentary process and is expected to be adopted before the end of April. Parliament may still introduce amendments.