On 25 March 2022, the Luxembourg Tax Authority updated Circular L.I.R. n° 168bis/1 (French) which clarifies certain aspects of the interest expense deduction limitation rules included in article 168bis of the Luxembourg Income Tax Law (ITL). Previously, the Circular was issued on 8 January 2021. The interest deduction limitation rules are in line with the EU Anti-Tax Avoidance Directive (ATAD), and effective from 1 January 2019.

The Updated Circular provides that with regard to the modification of the interest rate or the calculation of interest from 17 June 2016, when such a modification was not contractually provided for before this date, it is necessary to specify the case relating to the end of the LIBOR (London Interbank Offered Rate). A modification of the loan intended to compensate for the end of LIBOR should not, in principle, constitute a “subsequent modifications”, provided, in particular, that the said modification of the loan:

  • is strictly required to take into account the cessation of LIBOR or its non-representativeness;
  • does not alter the economic substance of the loan; and
  • does not include other modifications that could be qualified as “subsequent modifications” within the meaning of article 168bis, paragraph 7, letter a LIR.

The Circular also clarifies about the interaction between the interest deductibility limitation rule and the parent-subsidiary regime