On 3 February, the Luxembourg tax authority (LTA) issued a new version of Circular L.I.R. No. 164/1, which addresses the determination of interest rates for debit current accounts held by shareholders or partners of entities subject to corporate income tax. The 2025 update introduces new benchmarks for market-based interest rates and reinforces the importance of maintaining robust transfer pricing documentation, particularly in relation to the treatment of shareholder and intragroup current accounts.

The revised circular is particularly relevant for companies with shareholder or partner debit current accounts, entities engaged in intragroup financing or treasury activities, and businesses subject to Luxembourg corporate income tax. When the LTA identifies inconsistencies or inadequate documentation, companies may face administrative penalties, financial adjustments, or even legal consequences.

This article provides an analysis of the transfer pricing compliance process, new regulatory considerations for shareholder and intragroup accounts.

Transfer pricing compliance in Luxembourg

Luxembourg’s transfer pricing framework is outlined in articles 56 and 56bis of the Luxembourg Income Tax Law, section 171 of the Luxembourg Tax Code, and Circular L.I.R. No. 56/1-56bis/1 (the transfer pricing circular). These rules establish that all transactions between a Luxembourg company and associated enterprises must adhere to arm’s-length market conditions, including those involving business restructurings. To that end, a transfer pricing analysis must be prepared following the transfer pricing circular and the latest OECD transfer pricing guidelines.

Unlike other jurisdictions, where transfer pricing documentation must be submitted with tax returns, in Luxembourg businesses are not required to submit documentation proactively but must maintain it and provide it upon request. Furthermore, taxpayers must indicate in their annual corporate income tax returns whether they engage in intragroup transactions, regardless of their nature or amount. This disclosure obligation requires the attachment of an appendix demonstrating the application of the arm’s-length principle in intercompany transactions, ensuring compliance with section 171 of the tax code.

Many businesses assume that once their transfer pricing documentation is prepared and tax returns are filed, they have fulfilled their obligations. However, transfer pricing compliance is a continuous process. The LTA can reassess tax returns until the tax assessment is issued and until the statute of limitations expires, which is generally five years but may extend to 10 years in cases of nondeclaration or inaccurate reporting, regardless of whether there is fraudulent intent.

New regulatory considerations

The 2025 version of Circular L.I.R. 164/1 provides specific guidance on how interest rates should be determined for debit current accounts, distinguishing between cases in which the shareholder or partner is a natural person or a related enterprise.

Shareholder or partner is a natural person

For individual shareholders or partners, interest rates must align with market rates, and companies may refer to the average consumer loan rates published by the Banque Centrale du Luxembourg.

Interest must be recorded at the end of the financial year and calculated following standard banking industry practices.

If the current account remains in a debit position throughout the entire financial year, the applicable interest charge should be based on the arithmetic average of the opening and closing balances.

If the debit current account did not exist for the entire duration of the financial year or if there were significant variations in the balances, the arithmetic average of the debit balances at the end of the different months should be considered.

Figure 1 illustrates the methods for calculating the interest on debit balances.

For related enterprises, interest rates must be determined in compliance with the arm’s-length principle defined under articles 56 and 56bis of the Luxembourg Income Tax Law and reflected in article 164, paragraph 3 of the Luxembourg Income Tax Law, considering factors such as currency denomination, exchange rate risks, refinancing costs, and loan maturity.

It is important to point out that the 2025 circular explicitly states that only the provisions of service note L.I.R./N.S. No. 164/1 of June 9, 1993, relating to the criteria for a repayable debit current account, remain applicable.

For context, previous versions of the regulation were issued in 1998 and 1993. Both the 1998 version and the broader provisions of the 1993 version have been abolished. However, the specific provisions from the 1993 service note regarding the criteria for a repayable debit current account continue to apply.

To emphasise that debit current accounts must be structured as repayable loans, businesses must ensure that:

•   a formal repayment obligation exists rather than an informal arrangement;

•   failure to repay may lead to reclassification as a hidden profit distribution; and

•   even if the loan is deemed legitimate, nonpayment of interest could still be taxed as a hidden distribution.

Implications and risks for businesses

Businesses should assess the legal and economic substance of shareholder and intragroup debit current accounts by:

•   ensuring that shareholder loans recorded as debit current accounts meet the criteria of repayable loans, as outlined in the 1993 version of the circular; and

•   verifying that the debit current account represents an actual loan with a structured repayment schedule rather than an indirect dividend or hidden profit distribution.

Businesses should verify the presence of a formal loan agreement. A repayable debit account should be supported by a written loan agreement, which should include:

•   a fixed repayment schedule;

•   an agreed-upon interest rate based on market conditions; and

•  the company’s expectation of full repayment.

If no agreement exists or repayment is not realistically expected, the debit current account risks being recharacterized as a hidden profit distribution.

Businesses should ensure that interest is accrued and paid in line with market rates. Interest must be determined in accordance with the specifications in this article’s sections “Shareholder or Partner Is a Natural Person” and “Shareholder or Partner Is a Related Enterprise.” Interest must be accrued properly to avoid the risk of tax adjustments. If interest is not regularly paid, the LTA may consider the unpaid interest as a hidden distribution of profits.

Businesses should monitor repayment activity to avoid reclassification risks by regularly reviewing debit current accounts to ensure that the repayment schedule is being followed. If repayment has been delayed or abandoned, the transaction may be retroactively reclassified as a distribution under article 164, paragraph 3, of the Luxembourg Income Tax Law.

Businesses should implement strong internal documentation to justify loan treatment by maintaining detailed records of:

•  the original loan agreement;

•  interest payments and adjustments; and

•  any changes to the repayment schedule.

If the business is audited, these documents will help substantiate that the debit current account is a legitimate, repayable loan rather than a hidden profit distribution.

Conclusions

The 2025 version of Circular L.I.R. No. 164/1 represents a significant shift in Luxembourg’s transfer pricing landscape, particularly regarding shareholder and intragroup current accounts. The updated guidance reinforces the importance of market-based interest rate determination and proper transfer pricing documentation, emphasizing compliance with articles of the Luxembourg Income Tax Law and OECD guidelines.

Companies must ensure that intragroup financing arrangements adhere to the arm’s- length principle and that shareholder debit current accounts are structured as repayable loans to avoid reclassification as hidden profit distributions. Failure to comply may result in tax reassessments, administrative penalties and reputational risks.

A longer version of this article was originally published in the 10 March 2025, issue of Tax Notes International.

is the managing partner of Transfair Pricing Solutions and president of the Luxembourg Transfer Pricing Association (LTPA).