Key takeaways

Individual associates or shareholders

The Old Circular provided for a fixed interest rate of 5% applied on current accounts of natural persons in their capacity as associates or shareholders of entities subject to CIT in Luxembourg.

As opposed to the Old Circular, the New Circular now provides that the interest rate to be applied on current accounts shall be determined in accordance with the terms and conditions that would have been agreed upon for comparable loans in the market between independent parties, in in line with the arm’s length principle.

For the sake of simplicity, the New Circular provides for an interest rate corresponding to the annual interest rate applicable to consumer credit, which has to be proven and supported by any sort of document. Within this framework, the New Circular clarifies that reference to average monthly interest rates as published by the Central Bank of Luxembourg concerning the interest rates applied by Luxembourg credit institutions to deposits and loans in euros is accepted.

In line with the Old Circular, the New Circular maintains the provisions related to the interest calculation and clarifies that the provisions of L.I.R./N.S. memo 164/1 of 9 June 1993 remain applicable and in particular with respect to the criteria for a repayable debit current account.

Legal persons as associates or shareholders

The New Circular also maintains the provisions of the Old Circular in relation to the interest rates applied on loans between related parties. The New Circular repeats that in such cases, the interest rates to be taken into account are to be determined on a case-by-case basis respecting the arm’s length principle and should be a function of “notably” criteria such as the currency and the maturity of the loan, exchange risk, credit risk, the refinancing interest rate, “etc”.

Conclusion

To summarise, the fixed interest rate of 5% on current accounts of individual associates or shareholders no longer applies. Rather, the interest rate shall be determined in line with the arm’s length principle. A simplification measure allows referring to the interest rate for consumer credit as published by the Central Bank of Luxembourg.

As regards shareholder loans between companies, the New Circular repeats that they must be determined on the basis of the arm’s length principle, as was the case before.

Although the New Circular does not state it, the arm’s length nature of intercompany transactions in general, and the terms and conditions of shareholder loans in particular, need to be properly substantiated and documented in line with the obligations laid down in the general tax law and the income tax law.

If you require assistance or would like to know more on transfer pricing of interest rates between related parties do not hesitate to contact our specialists.