Bank loan accounting in Luxembourg: the entries

Bank loan accounting in Luxembourg: which entries?

Bank loan accounting in Luxembourg separates two flows that the bank statement mixes together: principal repaid, which is only a movement of debt on the balance sheet, and interest, the sole expense of the year, with drawdown crediting the debt and each instalment partly extinguishing it. At the closing, accrued interest is attached to the year and the debt is split by maturity.

Three entries are enough to carry a loan, and a fourth to present it. On drawdown, the bank account is debited and the amount owed to the credit institution credited with the amount received: no expense, no income, the balance sheet simply lengthens on both sides. At each instalment, the principal portion reduces the debt and only the interest portion becomes a financial expense. At the closing, interest accrued since the last instalment is attached to the year, then the debt is split between its portion falling due within one year and its portion falling due later.

The mistake we see most often in files taken over mid-year fits in one journal line: the whole instalment expensed, straight from the bank statement. The result is wrong twice over. The expense of the year is overstated by the principal repaid, and the liabilities side no longer carries the real debt: a company that has repaid a tenth of its loan shows a balance sheet in which the loan has disappeared altogether, or sits at an amount that reconciles with nothing in the bank's amortisation schedule.

That amortisation schedule is therefore as much a reference document for the cycle as the bank statement itself. It gives, instalment by instalment, the principal and interest portions, and it feeds the closing split. The account numbering used below follows the standard chart of accounts, applicable to financial years beginning on or after 1 January 2020.

Which accounts of the standard chart does a bank loan use?

The standard chart of accounts places a bank loan in Luxembourg in account 194, amounts owed to credit institutions, split between 1941 for the portion due within one year and 1942 for the portion due later; interest belongs to account 6552.

The detail matters for anyone reading the annual accounts. Account 194 sits in class 1, which carries equity, provisions and financial liabilities: bank debt is therefore not a class 4 operating liability, not even for the fraction repayable within twelve months. Account 6552, banking and similar interest, is subdivided by the nature of the financing: 65521 for interest on current accounts, that is on an overdraft or a day-to-day credit line, 65522 for interest on financing operations, that is on the amortising loan, and 65523 for interest on finance leases.

That subdivision is not cosmetic. It separates the cost of investment financing, which is compared with the useful life of the asset financed, from the cost of an overdraft, which measures a cash squeeze. A company that books both to the same account loses the one piece of information that says whether its financial expense comes from its investments or from its operating cycle, and the cash monitoring that a CFO as a service provides loses its simplest indicator.

We recommend one sub-account per loan under 1941 and 1942, rather than a single account aggregating every facility. Reconciliation with the amortisation schedule then becomes immediate: one balance per contract, one schedule line per contract. With a single account, the slightest difference forces you to recompute every loan to find where it comes from. That is the convention we apply in accounting and bookkeeping files.

How do you split a loan between amounts due within and after one year?

The split is assessed at each closing date, not at signature: the balance sheet layout under article 34 of the law of 19 December 2002 divides bank debt in Luxembourg between a remaining term of one year or less and a longer one. The caption therefore carries two amounts, not the loan balance.

The decisive word is "remaining". A seven-year loan is not a long-term debt for its whole balance: it is long term for the principal falling due beyond the twelve months after the closing, and it is a debt due within one year for the principal instalments of the next twelve months. The practical consequence is that a reclassification entry comes back every year, and that its amount changes every year, because it follows the amortisation schedule.

This split has no effect on profit and a direct effect on how the balance sheet reads. It drives the working capital and the liquidity ratio that the bank itself will look at next closing. Skipping the reclassification presents a company as if no instalment were due within the year, which inflates its working capital; applying it to the whole balance does the opposite. Both errors are corrected by reading the amortisation schedule at the right date, the closing date, and both show up when preparing the annual accounts.

One case is worth stating because it is counter-intuitive: where acceleration has occurred, for instance after a breach of a contractual clause, the debt becomes immediately repayable and its remaining term is no longer the one in the amortisation schedule. The whole balance is then presented as due within one year. The example below illustrates the normal case of a loan repaid in equal annual instalments of principal.

How is accrued interest recorded at the closing?

Accrued interest belongs to the year it remunerates, not to the instalment date: article 51, paragraph 1, point d) of the law of 19 December 2002 requires account to be taken of the expenses relating to the financial year irrespective of their payment date.

The calculation is a pro rata between the last instalment paid before the closing and the closing date itself. A loan whose interest is paid quarterly in arrears, on the 15th of February, May, August and November, leaves one and a half months of interest already owed and not yet paid at a 31 December closing. That amount is an expense of the year then ending, even though the bank will only collect it in February.

The matching item is a liability, and its place needs one clarification. The balance sheet caption for amounts owed to credit institutions includes interest accrued on those debts: interest follows the debt that produces it, rather than joining the accruals that carry operating liabilities not yet invoiced. In practice, an accrued-interest sub-account per loan, under the same account 194, keeps the reconciliation readable and avoids polluting the principal outstanding.

The symmetry is the same as for accrued interest on an intra-group loan, with one difference: the bank sends a statement, which provides external supporting evidence where a loan between related companies calls for a reciprocal confirmation. We keep that statement in the closing file as a matter of course: it is the document that supports the pro rata, and the one you look for two years later when a year's interest expense is questioned. Reconstructing after the fact a loan cycle booked from the bank statement costs more, measured against our fee schedule, than doing the split at the right time.

Where do arrangement fees and the repayment difference go?

Arrangement fees charged on drawdown are an expense of the year, unless they create a difference between the amount repayable and the amount received: the accounting law then allows that difference to be carried as an asset and written off over the life of the debt.

The rule is written in terms of amounts, not of the nature of the fee. Where the amount repayable on a debt exceeds the amount actually received, the difference may be shown as an asset; it must be disclosed separately in the balance sheet or in the annex, and it must be written off by reasonable annual amounts, at the latest by the time the debt is repaid. The option is aimed first at redemption premiums on bond issues, but its wording covers any commission withheld from the capital paid out.

Two practical consequences follow. First, "reasonable" is not "straight-line": the law sets a time limit, not a method, and the choice made belongs to the valuation rules to be described in the annex. Second, fees invoiced separately, collected by the bank from the current account and not withheld from the capital paid out, create no difference between the amount received and the amount repayable: they remain an expense of the year in which they are incurred. That is the most common case for an ordinary investment credit.

This option should not be confused with the one for formation expenses, which the accounting law requires to be written off within a maximum of five years and which relate to setting up the company, not to financing an asset. We regularly see the reverse when taking over a file: bank fees capitalised as formation expenses, where they do not belong, or a commission withheld from the capital expensed in full in the first year although the loan runs for seven. Public funding obtained for the same asset follows entirely different rules, set out in our article on accounting for investment grants.

What must the annex say about a bank loan and its security?

The annex must state the amount of debts with a remaining term of more than five years and the amount of all debts covered by security interests granted by the undertaking, together with the nature and form of that security.

The requirement sits in point 6° of paragraph 1 of article 65 of the law of 19 December 2002, and it survives the abridged regime: a small undertaking that omits most of the article 65 disclosures must keep this one, globally for all the captions concerned. In other words, no company size exempts you from telling the reader of the annual accounts that the assets are encumbered.

This is the most common weak spot in the annexes we review as a licensed accountant. The investment credit is correctly split on the balance sheet, the amortisation schedule reconciles, and the annex says nothing about the mortgage registered over the building financed, the pledge over the bank account or the assignment of trade receivables given as security. What is expected is not a general sentence: it is an amount of secured debt, plus the nature and form of each security interest.

Two habits prevent the omission. The first is to take the security interests straight from the credit agreement and the corresponding registrations, rather than reconstructing them from memory at the closing. The second is to deal with the question at the same time as off-balance-sheet commitments, whose total amount must also be disclosed: the same guarantees often feed both captions, and a cross-reading of the annual accounts immediately exposes any inconsistency between security disclosed and debt that is not.

Is interest on a bank loan deductible in Luxembourg?

Interest paid to a bank is in principle fully deductible in Luxembourg, whereas repayment of the principal borrowed never is: only the interest portion of the instalment reduces the company's taxable result.

Separating principal and interest in the accounts is therefore also what makes the tax position verifiable. A company that expensed whole instalments has deducted principal, and the correction will go against it; a company that recorded everything as a reduction of the debt has not deducted the interest it was entitled to. Here too the amortisation schedule is the document that settles the matter, year by year.

Three limits are worth knowing before treating the deduction as settled. The interest limitation rule caps the deduction of exceeding borrowing costs above a financial threshold, and its mechanics are set out in our dedicated article; checking it belongs with our tax, VAT and payroll work. Expenses economically connected with exempt income are not deductible, which bears directly on a loan taken out to acquire a shareholding. Finally, a loan granted not by a bank but by a shareholder calls for a review of the rate and of the level of debt that the third-party lender rule does not impose.

For the closing, keep the reading order: first the principal and interest split from the amortisation schedule, then the pro rata of accrued interest, and only then the deduction limits. Reversing that order means arguing about a cap before having a reliable interest expense, which is the surest way to miss the real error.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (authorisation 10077274). Accounts 194, 1941, 1942, 6552, 65521, 65522 and 65523 of the standard chart of accounts, the split of the balance sheet caption by remaining term, the attachment of accrued interest to the financial year, the option to carry as an asset the difference between the amount repayable and the amount received, the five-year maximum for formation expenses, the annex disclosures on debts due after more than five years and on security interests, and the non-deductibility of principal repayments were verified on 22 October 2026 against the sources below.

The sources consulted are the following. From the amended law of 19 December 2002 on the trade and companies register and on the accounting and annual accounts of undertakings, as published in the Official Journal and consolidated on Legilux: article 34 and the balance sheet layout adopted to implement it, for the caption of amounts owed to credit institutions divided between a remaining term of one year or less and a remaining term of more than one year;

article 51, paragraph 1, point d), for taking account of the expenses and income relating to the financial year irrespective of the date of payment or receipt; article 63 in the Official Journal numbering, for the option to carry as an asset the difference between the amount repayable and the amount received, for its separate disclosure in the balance sheet or the annex, and for its write-off by reasonable annual amounts at the latest when the debt is repaid;

the rule writing off formation expenses within a maximum of five years; article 65, paragraph 1, point 6°, for the amount of debts with a remaining term of more than five years, for the amount of debts covered by security interests with the nature and form of that security, and for the retention of that disclosure, on a global basis, in the abridged annex.

From the grand-ducal regulation of 12 September 2019 determining the standard chart of accounts, applicable to financial years beginning on or after 1 January 2020, and from the 2020 standard chart of accounts form published on the eCDF platform: account 194 for amounts owed to credit institutions and its subdivisions 1941 and 1942 by remaining term, account 6552 for banking and similar interest and its subdivisions 65521 for current accounts, 65522 for financing operations and 65523 for finance leases.

From the Guichet.lu portal, the page on the chart of accounts for businesses, for the date of application of the chart, the pages on the methods for drawing up annual accounts, for the general valuation principles, and the page on debt financing, for the in-principle full deductibility of interest paid to third parties and for the non-deductibility of principal repayments. From the Luxembourg Inland Revenue, the documentation on the limitation of the deduction of exceeding borrowing costs, for the existence of the cap and of the financial threshold whose detail is set out in our dedicated article.

Finally, from the publications of the Accounting Standards Commission on the standard chart of accounts and the mapping tables, for the articulation between the chart and the annual accounts layouts.

Four points could not be verified against an official source at this date and are therefore not asserted here. First, the domains legilux.public.lu, guichet.public.lu, ecdf.b2g.etat.lu, cnc.lu and impotsdirects.public.lu are blocked by the network proxy of our editorial environment: those pages were read through indexed extracts obtained with a search restricted to official domains, and the statements above reproduce those extracts without extrapolation.

Second, the numbering of the 2020 standard chart sub-accounts below 1941 and 1942: the 2009 version distinguished principal from accrued interest at that level, a distinction we could not find in the 2020 version; the article therefore stays with accounts 194, 1941 and 1942 and recommends an internal sub-account rather than an official number. Third, the article number of the repayment difference rule in the consolidated version in force: it is cited here as it appears in the Official Journal version, and the consolidated numbering may differ.

Fourth, the absence of any provision requiring the effective interest method to spread the costs of a loan: we found no text requiring it, which is not the same as a text excluding it. Readers can confirm these points on legilux.public.lu, on ecdf.b2g.etat.lu, on cnc.lu and on guichet.public.lu.

This article sets out the state of the law at the date of publication and does not constitute personalised legal or tax advice: the nature of the financing, the clauses of the credit agreement, the security granted, the size of the undertaking and the annex regime applicable all change the outcome. Legislation, regulations and practice evolve, and any decision binding your structure must be verified at the date you rely on it. Report an error to contact@financialservices.lu: the correction is dated in the article.