1. Elimination of the fixed 5 per cent rate
   The long-standing fixed interest rate of 5 per cent for shareholder current accounts is no longer valid. Instead, interest rates must align with market conditions and reflect terms that independent parties would agree to, adhering to the arm’s length principle.
2. Simplified approach for individual shareholders
   To ease compliance, companies may reference annual consumer credit rates published by the Central Bank of Luxembourg. The average of monthly rates during the relevant financial period can serve as a benchmark, provided supporting documentation is maintained.
3. Clarification for associated enterprises
   For transactions between associated enterprises (eg, intercompany loans), the circular reiterates that interest rates must be determined on a case-by-case basis, factoring in elements such as currency, credit risks, refinancing rates, and loan maturity.

This shift calls for a proactive approach to compliance. Luxembourg companies should review and align their position with the updated guidelines, ensuring proper documentation to substantiate arm’s length terms. Individual shareholders should also reassess their tax positions to mitigate any risks.

For guidance on implementing these updates, consult our tax experts.

The Circular L.I.R. n° 164/1 (in French) can be found here.