Amendment of the Luxembourg interest limitation rules

On 11 December 2024, the Luxembourg Parliament approved the "tax incentive" package for corporations and individuals submitted by the government in July and included in the draft law 8414 (the "Draft Law").

As part of these measures, we focus more specifically on the technical amendment made to the Luxembourg interest limitation rules of article 168bis of the Luxembourg Income Tax Law ("LITL"), which consists in the introduction of the concept of "Single Company Worldwide Group" ("SCWG"). This modification is applicable as from financial years starting on 1^st^ January 2024.

What is a SCWG?

A taxpayer can be a member of a SCWG if it complies with the following cumulative conditions:

1. The taxpayer is not part of a consolidated group for financial reporting purposes; and
2. The taxpayer has one or several associated enterprises or permanent establishments as defined by article 168bis LITL.

Application of the Equity Escape Rule to the SCWG

Where a taxpayer qualifies as SCWG, it can benefit from the application of the equity escape rule provided by the interest limitation rules. Said differently, if such taxpayer can demonstrate that the ratio of its equity over its total assets is equal to, or greater than the equivalent group ratio (i.e. if the ratio between the taxpayers' equity and all of its own assets is lower than two percent), all of its borrowing costs will be deductible without limitation for tax purposes. 

Impact of the SCWG and limitations

This new concept aligns closely with, but is distinct from, the concept of standalone entities. We anticipate that it could notably apply in practice to certain structures involving securitisation vehicles.  

However, entities must ensure that the economic and commercial arrangements put in place are genuine and not implemented solely in order to benefit from the equity escape clause as the revised Article 168bis introduces a specific anti-abuse rule regarding the application of such rule to SCWG.

Conclusion

The introduction of the SCWG concept marks a positive development for Luxembourg's capital market industry. By extending the scope of the equity escape rule, the Draft Law reinforces Luxembourg's position as a competitive hub for structured finance and securitization vehicles.