Amendment to the Luxembourg interest limitation rules

The Luxembourg law which implemented the first European Union (EU) Anti-Tax Avoidance Directive (ATAD I) was published on 21 December 2018, and took effect in respect of financial years starting on or after 1 January 2019.

At the time of ATAD I’s implementation, Luxembourg added securitisation entities, as defined at Article 2(2) of the EU Securitisation Regulation of December 2017 (the EU Securitisation Regulation), to the list of financial undertakings thereby excluding them from the scope of the interest limitation rules.

On 14 May 2020, the European Union Commission (the Commission) sent Luxembourg a letter of formal notice (the Letter), requiring it to correctly transpose the interest limitation rules as stated in Council Directive (EU) 2016/1164 of 12 July 2016 into Luxembourg law. According to the Commission Luxembourg went beyond the permitted exemptions of "financial undertakings" by including in this definition securitisation vehicles covered by the EU Securitisation Regulation. The Letter was followed by the Commission’s reasoned opinion (the Opinion), sent in December 2021.

In response to the Commission’s Letter and Opinion, a draft law was presented to the Luxembourg Parliament on 9 March 2022. The latter proposes to amend Article 168bis of the Luxembourg income tax law, excluding securitisation vehicles covered by the EU Securitisation Regulation from the list of financial undertakings.

The proposed change in the tax law would apply from the financial year starting on 1 January 2023.

As a result of the above, Luxembourg securitisation vehicles which, to date, have benefitted from this exemption should seek tax advice on their situation going forward to analyse if there are any tax impacts on their business.