In line with the Law, the Circular confirms that the equity escape clause is an exceptional rule giving a taxpayer, under certain conditions, the possibility to deduct the full amount of the exceeding borrowing costs it has incurred in a given financial year. This Alert details the various comments and clarifications provided by the Circular on the application of the equity escape clause. Exceeding borrowing costs are defined as the excess of borrowing costs (i.e., interest expenses on all forms of debt, other costs economically equivalent to interest, as well as expenses incurred in relation with the raising of finance) over interest income and other economically equivalent taxable revenues. Under the equity escape clause, where the taxpayer is a member of a consolidated group for financial accounting purposes, it may, upon request, deduct the entire amount of its exceeding borrowing costs if it can demonstrate that the ratio of its equity over its total assets is lower by not more than two percentage points, equal to or higher than the equivalent ratio of the group.
The updated Circular introduces a specific section dedicated to the safeguard clause for entities in a consolidated group, referred to as the “equity escape clause”. These rules limit the deductibility of taxpayers’ borrowing costs to the higher of 30% of taxable EBITDA (Earnings (taxable profits) before Interest, Tax, Impairments, Depreciation and Amortization) or €3 million.
The Law implements the European Union (EU) Anti-Tax Avoidance Directive 2016/1164 (2016) (ATAD) ii. On 2 June 2021, the Luxembourg Tax Authorities updated the Circular originally issued on 8 January 2021 i clarifying certain technical aspects of the interest limitation rules introduced in the Luxembourg legislation by law in 2018 (the Law).
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