On 29 January 2025 the Luxembourg tax administration issued a circular clarifying the interest rate to be applied to overdrawn shareholder current accounts (L.I.R. n° 164/1).
Two situations are considered: whether the shareholder is a company or an individual.
- In the case the shareholder is a company and the claim originates in the relationship between affiliated undertakings (such as between parent and subsidiary or collective undertakings belonging to a same group), the interest rate is to be determined on a case-by-case basis in line with the arm’s length principle.
The interest rate to be applied depends a.o. on the claim’s currency, currency exposure, hedging risk, refinancing interest rate, maturity of the claim, etc.
- In the case the shareholder is an individual: again the arm’s length principle applies, i.e. the interest rate is to be determined according to market conditions applying to a loan among independent market players acting on the open market.
For simplicity purposes, it is allowed to apply an interest rate corresponding to the annual interest rate applicable to consumer credit. This is to be substantiated, possibly by reference to the interest rates applied by Luxembourg credit institutions to Euro-denominated deposits and loans as published by the Central Bank of Luxembourg.
It is to be kept in mind that:
- Monies allocated to a shareholder are deemed to constitute a loan comparable to financial transactions among third parties if it is of limited duration with expected full reimbursement (written agreement and repayment schedule);
- If there is no sign of willing reimbursement from the beneficiary, drawdowns may be requalified as hidden dividend distributions that may be subject to withholding tax.
We remain at your disposal for more information on the application of the circular and for analyzing and securing your situation in relation to the above.
