New Luxembourg circular: Shareholder loans to be compensated at arm’s length
Peter Andersen
Transfer Pricing Partner Questro International, Chair of Danish Dutch Chamber of Commerce & Director Otico Software
Under the previous circular, natural shareholders and entities subject to corporate income tax received interest at a rate of five percent on their shareholder loans.
The New Circular (L.I.T.C. No. 164/1 dated 29 January 2025) however requires an arm’s length approach.
The New Circular distinguishes between shareholder loans (referred to as “shareholder current accounts” in the circular)?granted by natural persons and related enterprises.
Natural person shareholder loan
Presumably, for ease of application, natural persons are allowed to calculate the interest due on shareholder loans by reference to average rates for new consumer loans published monthly by the Central Bank of Luxembourg. For December 2024 this interest rate for loans between 1 and 5 years was 4.82%.
Related enterprise shareholder loan
The tax administration will assess loans between related enterprises on a case-by-case basis using the arm’s length principle. It details that the applicable interest rate depends among others on the currency of the loan, exchange rate risk, hedging risk, refinancing interest rate, maturity of the receivable, etc.