The Luxembourg interest limitation rule

Debt can be deductible in the accounts without being fully deductible for Luxembourg income tax. Article 168bis limits the net financing cost that a taxpayer may deduct in one financial year. The rule has applied to financial years starting on or after 1 January 2019.

The calculation is often relevant to acquisition companies, real-estate structures and group financing vehicles. It comes after other tax rules. A payment reclassified as a hidden distribution or linked to exempt income does not become deductible simply because it fits within the Article 168bis limit.

The annual deduction limit

Under Article 168bis of the Income Tax Law, exceeding borrowing costs are deductible up to the higher of two amounts.

Test	Maximum deduction
Tax EBITDA test	30% of tax EBITDA
Fixed floor	EUR 3 million

The test applies for each financial year. A short financial year does not reduce the EUR 3 million amount proportionally. The taxpayer first determines which borrowing costs are otherwise deductible, then applies the limitation to the remaining net amount.

The fixed amount is a deduction floor rather than a general exemption. Interest can still be denied under transfer-pricing, participation-exemption, anti-hybrid or distribution rules before Article 168bis is calculated.

Net financing and tax EBITDA

Borrowing costs are broader than interest on an ordinary loan. They can include economically equivalent financing charges, the interest element of finance leases, capitalised interest, specified foreign-exchange results and certain guarantee or arrangement fees.

Exceeding borrowing costs are the deductible borrowing costs left after taxable interest income and economically equivalent taxable income are deducted. A Luxembourg company that borrows and on-lends therefore applies the rule to its net financing position, not simply to its gross interest expense.

Tax EBITDA starts from taxable net income and adjusts for exceeding borrowing costs, depreciation and amortisation. Tax-exempt income is removed from the base. The ACD circular of 25 March 2022 explains these definitions and the order of the calculation.

The effect on holding companies

A SOPARFI may receive dividends and capital gains that qualify for the participation exemption. That exempt income does not increase tax EBITDA. When the company has little other taxable income, the 30% branch can be low and the EUR 3 million floor becomes the main annual limit.

The result differs for a financing company earning taxable interest. Its taxable margin can support tax EBITDA, although the amount still depends on the full income and expense profile.

The interest rate and debt amount must first satisfy the arm’s-length principle. The intragroup financing analysis and the Article 168bis calculation answer different questions and should be kept in that order.

The statutory exclusions

Defined financial undertakings are outside the interest limitation rule. The statutory list covers specified regulated entities and funds. The classification should be checked against the exact definition rather than inferred from a commercial description.

A qualifying standalone entity is also outside the rule. It must have no associated enterprise, no foreign permanent establishment and no place in an accounting consolidation. A shareholder or group relationship can therefore remove the exclusion even when no consolidated accounts are prepared.

Borrowing under loans concluded before 17 June 2016 can be excluded, but later modifications may narrow or end that protection. A change in amount, term, rate or parties requires a review of the original contractual position. Borrowing used for a qualifying long-term public infrastructure project in the European Union is subject to a separate exclusion.

Carry-forwards

Exceeding borrowing costs that cannot be deducted in the current year carry forward without a time limit. The oldest amount is used first when deduction capacity becomes available in a later year. The carry-forward remains attached to the taxpayer that incurred the cost, subject to the statutory rules for qualifying reorganisations.

Unused interest capacity can be carried forward for five financial years. This capacity is not simply the unused part of the EUR 3 million floor. It follows the specific tax-EBITDA calculation in Article 168bis.

The annual tax file should therefore distinguish current-year costs, older disallowed costs and unused capacity by year. Combining them in one balance can hide expiry dates and the order in which amounts are used.

The equity escape

A taxpayer that belongs to a consolidated accounting group may request full deduction when its ratio of equity to total assets is equal to or higher than the equivalent group ratio. A ratio up to two percentage points lower is treated as equal, provided the statutory valuation and accounting conditions are met.

The Law of 20 December 2024 added a comparable route for a taxpayer with associated enterprises or a foreign permanent establishment that is not part of accounting consolidation. This single-entity-group rule applies to financial years starting on or after 1 January 2024 and includes adjustments for debt owed to associated enterprises.

The escape is requested and evidenced. It is not automatic merely because the company appears well capitalised on its standalone balance sheet.

The fiscal unity calculation

Within a Luxembourg tax consolidation, the rule is generally calculated at group level. The members’ borrowing costs, taxable financing income and tax EBITDA are aggregated, and one EUR 3 million floor applies to the fiscal unity.

The members may jointly elect an entity-by-entity calculation in the initial request, and that election applies for the duration of the regime. The choice changes how taxable EBITDA and borrowing costs can be shared across the group, so it should be modelled when the fiscal unity is formed rather than selected during the annual return process.

Conclusion

Article 168bis limits net borrowing costs by reference to the higher of 30% of tax EBITDA and EUR 3 million. Exempt income, earlier deduction rules, statutory exclusions, carry-forwards and the group position can each change the result. The annual computation should follow the legal and accounting character of the financing rather than treating total interest expense as one number.