The Luxembourg interest limitation rule: article 168bis LIR in practice

Leverage is a design choice in every Luxembourg structure, and since 2019 it comes with a statutory ceiling. Article 168bis LIR, introduced by the law of 21 December 2018 transposing ATAD, caps the deduction of net financing costs for financial years starting on or after 1 January 2019.¹ For private equity holdcos funded with shareholder debt, real estate platforms and leveraged group financing companies, the rule decides how much of the interest line actually reduces the Luxembourg tax base.

The mechanics look simple — 30% of EBITDA or €3 million, whichever is higher — but the definitions, the exclusions and the interaction with older deduction limits carry most of the outcome. The rule rewards structures that were modelled before the debt was put in place rather than reconstructed at filing time.

The core rule and its base

Exceeding borrowing costs of a taxable period are deductible only up to the higher of 30% of the taxpayer’s tax EBITDA or €3 million.² The test applies per taxpayer — a fully taxable Luxembourg company or the Luxembourg permanent establishment of a foreign company — and per financial year, a short year counting as a full one without proration.

Borrowing costs are defined broadly. Interest on all forms of debt is joined by economically equivalent costs and financing-related charges, including payments under profit-participating loans, imputed interest on convertible and zero-coupon instruments, the interest element of finance leases, capitalised interest, certain foreign-exchange results on borrowings, and guarantee or arrangement fees.³ Exceeding borrowing costs are the surplus of deductible borrowing costs over taxable interest income and other economically equivalent taxable income, so a company that on-lends at a margin is measured on its net position.

Tax EBITDA is the total net income increased by the exceeding borrowing costs, amortisation and depreciation, with a decisive exclusion. Tax-exempt income — participation-exemption dividends and gains, treaty-exempt profits — is removed from the base, together with the expenses economically connected to it.

Why the €3 million floor drives holding structures

The EBITDA exclusion reshapes the analysis for a classic SOPARFI. A holding whose income consists of exempt dividends and capital gains shows a tax EBITDA close to zero, so the 30% branch yields nothing and the €3 million de minimis becomes the operative limit.

The order of application matters as much as the cap. Interest connected to exempt participation income is already non-deductible up to that income under the recapture rules, and amounts requalified as hidden distributions are never borrowing costs. Article 168bis only measures what survives those earlier filters, which prevents the same euro of interest from being disallowed twice but also means the modelling must run the deduction rules in sequence.³

A simple profile shows the mechanics. A holdco pays 5 million of arm’s-length interest on shareholder debt funding taxable financing activity and receives 1.5 million of taxable interest on downstream loans. Exceeding borrowing costs are 3.5 million, the exempt dividend stream is out of EBITDA, and the deduction is capped at the €3 million floor, the remaining 0.5 million carrying forward. Whether the shareholder-debt pricing itself holds is a separate, prior question of intragroup financing and transfer pricing.

Grandfathered loans and the other exclusions

Loans concluded before 17 June 2016 stay outside the rule, but the exclusion does not survive modification. A change to maturity, rate, amount or parties that was not contractually pre-agreed before that date ends the protection, and only partially, since costs based on the original terms remain covered. Pre-agreed adjustments, drawdowns within the original ceiling of a pre-2016 facility and the strictly necessary, economically neutral replacement of a discontinued reference rate are tolerated.³ Loans funding long-term public infrastructure projects located in the EU are equally excluded, together with the related income.

Two categories of taxpayers escape entirely. A standalone entity — no accounting consolidation, no associated enterprise, no foreign permanent establishment — deducts its exceeding borrowing costs in full, a status read strictly since a 25% shareholder with other entities already creates association. Financial undertakings are also out of scope, on a list running from credit institutions, insurers, UCITS and their managers to AIFs managed by an authorised AIFM and securitisation entities within the meaning of the EU Securitisation Regulation. That last carve-out remains in force despite the European Commission’s infringement action, the Advocate General having proposed in June 2026 to dismiss the case against Luxembourg, with the judgment still pending — a point that matters for leveraged securitisation vehicles outside the EU regulation’s definition, which never had the benefit.⁴

The equity escape and the 2024 single-entity clause

A taxpayer consolidated in group accounts can request full deduction under the equity escape. The test compares the ratio of equity over total assets of the taxpayer with the equivalent ratio of its group, a ratio up to two percentage points lower being tolerated, with assets and liabilities valued under the same framework as the consolidated accounts, IFRS or the GAAP of an EU member state.²

The law of 20 December 2024 extended the logic to taxpayers that have associated enterprises or a foreign permanent establishment but no accounting consolidation, retroactively for financial years starting on or after 1 January 2024. This single-entity group clause rebuilds a notional group ratio, with an anti-leverage correction that adds debts towards associated enterprises — the association threshold lowered to 25% for this purpose — back to group equity, and a dedicated anti-avoidance rule.⁵ The current circular of 25 March 2022 predates this clause, so positions taken under it rest on the statute alone for now.

Carry-forwards and the fiscal unity computation

Nothing expires on the expense side. Non-deducted exceeding borrowing costs carry forward without time limit, oldest first, personally attached to the taxpayer and continued through a tax-neutral transformation. Unused interest capacity carries forward five years, and only arises in a year where exceeding borrowing costs were above €3 million and constrained by the 30% branch.³

Inside a fiscal unity, the limitation is computed at group level by default since the rule’s first year of application. Borrowing costs, taxable interest income and tax EBITDA of all members are aggregated at the integrating parent, a single €3 million serves the whole group, and the group-level equity escape requires every member to belong to the same accounting consolidation, certified by an approved statutory auditor. Members can jointly elect entity-by-entity application instead, an option that binds for the duration of the regime.⁶ The choice is genuinely structural, since pooling helps groups whose interest expense and EBITDA sit in different entities, while separate application preserves several de minimis amounts outside the unity.

The practical discipline follows from the design. Sizing shareholder debt against the €3 million floor, protecting grandfathered facilities from casual amendments, tracking carry-forwards in the tax returns and revisiting the fiscal-unity option when the group perimeter moves are the four habits that keep article 168bis a modelling parameter rather than a year-end surprise.

Footnotes

1. Law of 21 December 2018 transposing Directive (EU) 2016/1164, published in Mémorial A No 1164 of 21 December 2018, applicable to financial years starting on or after 1 January 2019. ↩

2. Article 168bis of the amended law of 4 December 1967 on income tax, coordinated text published by the tax administration. ↩ ↩²

3. Circular of the director of the tax administration L.I.R. No 168bis/1 of 25 March 2022. ↩ ↩² ↩³ ↩⁴

4. Opinion of Advocate General Kokott of 18 June 2026 in case C-138/24, Commission v Luxembourg, available on EUR-Lex. ↩

5. Law of 20 December 2024, article 11, published in Mémorial A No 589 of 24 December 2024, applicable to financial years starting on or after 1 January 2024. ↩

6. Article 164bis of the amended law of 4 December 1967, as reshaped by the law of 26 April 2019 published in Mémorial A No 274 of 26 April 2019. ↩