Among other tax incentives for individual and corporations, the Luxembourg Parliament adopted on 11 December 2024 an amendment to the interest deduction limitation rule via the introduction of the concept of a single-entity group (SEG) (groupe à entité unique).
What Is an SEG?
An SEG is a taxpayer who:
- a) is not part of a consolidated group for financial reporting purposes
- b) is not a taxpayer who has neither an associated enterprise within the meaning of Article 164ter, paragraph 2, of the Luxembourg income tax law (LITL) nor a permanent establishment located in a state other than the Grand Duchy of Luxembourg
For the purposes of this definition, a taxpayer who is excluded from the consolidated financial statements of the group due to its insignificant interest or small size is considered to be part of a consolidated group for financial reporting purposes.
Consequences of Being an SEG
When a taxpayer qualifies as an SEG, the entirety of its exceeding borrowing cost remains deductible upon request if the taxpayer can demonstrate that the ratio between its equity and its total assets is equal to or greater than the equivalent ratio of the group. The ratio between the taxpayer’s equity and its total assets is considered equal to the equivalent ratio of the SEG if the taxpayer’s ratio is lower than 2%.
For the determination of the ratio of the SEG referred to in this paragraph, the equity of the group is to be increased by the amounts that could give rise to borrowing costs and are owed by the taxpayer to associated enterprises within the meaning of Article 168ter, paragraph 1, item 18 LITL. For the purposes of this determination, the 50% threshold referred to in Article 168ter, paragraph 1, item 18 LITL is replaced by a threshold of 25%.
A specific anti-abuse rule is also included because any arrangement or series of arrangements implemented with the primary purpose, or one of the primary purposes, of avoiding the obligation to increase the equity amount of the group for the purpose of determining the SEG ratio shall be disregarded for the application of this provision.
What’s Next?
This new provision (which applies retroactively from 1 January 2024) is a welcome measure designed to reinforce Luxembourg’s attractiveness and that could potentially apply to certain securitization transactions. It is therefore important for taxpayers to assess the potential impact of these new rules on their business structures.
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