Formation expenses in Luxembourg: asset or expense?

Formation expenses in Luxembourg: balance sheet asset or expense of the year?

Formation expenses in Luxembourg are an accounting option rather than an obligation: the law allows expenses connected with the creation or the extension of an undertaking to be carried as assets, and a company that does not use that option leaves them in the charges of the year in which they are incurred, with no later catch-up.

The boundary is drawn by the text itself. May be carried as assets under formation expenses those expenses which are connected with the creation or the extension of an undertaking, as opposed to day-to-day management expenses. The word "may" is not a drafting detail: it opens an option. The European accounting directive follows the same logic, covering formation expenses as defined by national law and in so far as national law authorises them to be carried as assets.

The choice is made when the expense is incurred and it binds the whole financial year. Taken to profit and loss, incorporation costs crush the first year's result, which is often a loss already, and it is the carry-forward of losses that moves them into later years. Carried as assets, they spread the charge over five financial years at most, leave a higher balance sheet total, and trigger two duties that an immediate charge does not carry: a comment in the notes and a lock on distributions. There is no general right answer, only a decision to document when the company is formed.

One confusion keeps coming back in files taken over, and it is not a matter of presentation. Formation expenses are not prepaid expenses: a charge to be carried forward matches a service already invoiced for a future period, whereas a formation expense is a definitively consumed outlay of which only the charge is spread by amortisation. The two items live neither in the same place on the balance sheet nor under the same regime, and an annual subscription wrongly capitalised as a formation expense ends up written off over five years where it should have been taken to charges in the very next year.

Which costs can be recorded as formation expenses?

The costs that can be recorded as formation expenses in Luxembourg are those connected with the creation or the extension of the undertaking: incorporation costs, initial establishment costs, capital increase costs and loan issue costs, to the exclusion of day-to-day management expenses.

The standard chart of accounts sets out the detail of the heading. Account 20 brings together incorporation costs, initial establishment costs, capital increase costs, loan issue costs and other formation expenses. The chart applicable to financial years beginning on or after 1 January 2020, set by the grand-ducal regulation of 12 September 2019 which replaced the one of 10 June 2009, simplified that heading by merging two former accounts and removing sub-accounts that had become redundant.

The concrete content of each line is found in tax practice, which remains the most explicit source. Circular L.I.R. no. 101 of 5 November 1985 lists as formation expenses the costs of incorporation, notary fees, registration duties and advisory fees, together with capital increase costs and loan issue costs. The Guichet.lu portal puts notary fees and contribution duties in the same category, noting that they bring no item onto the company's balance sheet. That is precisely what separates them from an incidental acquisition cost, which follows the asset it served to acquire.

Two exclusions are worth remembering. Research costs can no longer be capitalised for financial years beginning on or after 1 January 2016: the 2015 accounting reform removed that option while keeping the one for development costs, which live under a separate item. And a cost incurred to acquire a fixed asset is not a formation expense: it enters the asset's purchase price and follows its depreciation schedule, along the usual useful lives of its category.

Where do formation expenses sit on the Luxembourg balance sheet?

Capitalised formation expenses sit in Luxembourg under item B of the balance sheet, between subscribed capital unpaid and fixed assets: they are therefore not intangible fixed assets, yet they do count towards the balance sheet total.

That position has a consequence practitioners spot at filing time. Question and answer 16/010 of the Commission des normes comptables sets out the layout applicable to financial years beginning on or after 1 January 2016 with, in order, "A. Capital souscrit non versé", "B. Frais d'établissement", then "C. Actif immobilisé". Since the total of assets is made up of items A to E, capitalised formation expenses mechanically increase the balance sheet total, and with it the size criterion attached to it.

The effect is not theoretical for a structure close to a threshold. Size criteria are read on the balance sheet total, net turnover and the number of employees, and the 2024 increase of article 35 of the accounting law raised the small undertaking's balance sheet total to EUR 7.5 million and net turnover to EUR 15 million. At that scale, a few tens of thousands of euros of capitalised costs tip no category; on a young company with a very short balance sheet they do, however, move the ratios a banker reads.

The notes, finally, are not optional on this item. The accounting law requires the items recorded under formation expenses to be commented on in the notes, and the directive adds that derogations from the write-off period, reserved for exceptional cases, must be disclosed there and duly justified. A small undertaking allowed to present an abridged balance sheet shows only the items preceded by letters and roman numerals, which leaves item B visible: the exemption from detail is no exemption from the comment, and it is the work of preparing the annual accounts that carries it.

Over how long must formation expenses be written off?

Formation expenses carried as assets in Luxembourg must be written off within a maximum of five years, a ceiling the accounting law takes from the European accounting directive: five years is a maximum, not an imposed period.

The text is short and unconditional. Formation expenses must be written off within a maximum period of five years, a rule the Guichet.lu portal repeats on its page about the methods for preparing annual accounts. Directive 2013/34/EU states the same thing: where national law authorises formation expenses to be carried as assets, they must be written off within a maximum period of five years.

A maximum period is not a default period, and the choice made must stay consistent from one year to the next. Nothing prevents writing off over three years incorporation costs whose economic usefulness is concentrated at start-up; nothing allows going beyond five years, except the derogation the directive reserves for exceptional cases, to be disclosed and justified in the notes. The value adjustment is booked in class 6, in the charge account the standard chart of accounts reserves for value adjustments on formation expenses, and not as a direct reduction of the asset item.

One case resists the rule, and the profession flagged it during the preparatory work on the standard chart of accounts. Loan issue costs sit under the same heading as formation expenses, in account 204, although they naturally amortise over the life of the financing, which often exceeds five years. In practice, a ten-year loan whose set-up costs are capitalised forces a choice between the five-year ceiling attached to the item and the term of the loan; the position taken is justified in the notes, and the file must carry the reasoning.

Why do unamortised formation expenses block a dividend?

Unamortised formation expenses block a distribution in Luxembourg because the accounting law prohibits any distribution of results for as long as they are not fully written off, unless available reserves and profits brought forward at least match the unamortised amount.

The mechanics are checked in a few lines and belong before the general meeting. You take the amount of formation expenses not yet written off, then compare it with the sum of the reserves available for that purpose and the profits brought forward. If that sum covers the unamortised amount, a distribution remains possible within the usual limits of distributable profit; if it does not, the distribution is prohibited. The same rule applies in the same terms to the development costs item, as the consolidated text of the accounting law expressly states.

The mistake we regularly see on this point is not a calculation error, it is a missing control. A young company capitalises its incorporation costs, posts a profitable first year, and the meeting resolves on a distribution without anyone having looked at the unamortised balance of item B: the decision is taken, the entry is booked, and the irregularity only surfaces at the next review, when correcting it costs more than the control that would have avoided it. Two lines in the closing file are enough, provided they come before the minutes are drafted.

The lock has a strategic consequence for holding structures. A company set up to receive a participation, which capitalises its incorporation costs and plans to push a first dividend up as early as the following year, hands itself an obstacle it would have avoided by leaving those costs in charges. The trade-off between the first year's result and freedom to distribute is therefore settled at formation, and it belongs to the structuring decision far more than to the bookkeeping entry.

How are formation expenses treated for tax in Luxembourg?

The tax treatment of formation expenses in Luxembourg follows the commercial balance sheet, through the linkage principle: the values retained in the tax balance sheet are those of the commercial balance sheet where the tax valuation rules do not require a given amount.

The starting point is therefore an accounting one. Article 40 of the amended law of 4 December 1967 on income tax provides that, where the rules governing valuation for tax purposes do not require valuation at a given amount, the values to be retained in the tax balance sheet must be those of the commercial balance sheet. The same article adds that the usual useful life taken into account to compute normal depreciation in the tax balance sheet must tally with the one retained in the commercial balance sheet. A capitalisation choice is therefore not tax-neutral: it travels into the tax balance sheet.

On the period, the administration leaves room. The Guichet.lu page on computing the operating result of a sole trader or a transparent partnership states that formation expenses, including notary fees and contribution duties, are amortisable over a period of one to five years at the taxpayer's option. That scope is worth stressing: the page covers the result of the self-employed person, whose computation base also carries their social contributions, and not the result of a company limited by shares.

Circular L.I.R. no. 101 of 5 November 1985 for its part retains a write-off in principle over five years, a period that may be extended. These two sources do not cover the same scope and the second is old: the framing of a corporate file is done with the coordinated text in hand.

There remains the nature of the outlays, which drives duties and tax. Company deeds, incorporation, amendment of the articles and transfer of the registered office, are subject to a specific fixed duty of EUR 75 collected by the Administration de l'enregistrement, des domaines et de la TVA, paid at the notary for companies where a notarial deed is required and on filing with the register for the other forms; the business permit application separately carries a chancery duty of EUR 50.

The amount capitalised is the amount net of deductible value added tax, never the amount inclusive of tax, and the split between what may be capitalised and what may not is decided on the invoice, not at the closing date: that is a routine question for the licensed accountant, not a year-end judgement call.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (authorisation 10077274). The option to carry these costs as assets and its scope, the rank of the item on the balance sheet, the composition of the balance sheet total, the five-year maximum write-off period, the prohibition on distribution and its exception, the mandatory comment in the notes, the content of the standard chart of accounts heading, the linkage of the tax balance sheet to the commercial balance sheet, the one-to-five-year tax option, the EUR 75 fixed duty and the EUR 50 chancery duty were verified on 21 October 2026 against the sources below.

The sources consulted are the following.

From Legilux, the amended law of 19 December 2002 on the trade and companies register and on the accounting and annual accounts of undertakings, read for the option to carry as assets the expenses connected with the creation or the extension of an undertaking as opposed to day-to-day management expenses, for the write-off within a maximum period of five years, for the prohibition on any distribution of results for as long as those expenses are not written off unless the reserves available for that purpose and the profits brought forward at least match the unamortised amount, for the extension of that same rule to the development costs item in the consolidated text, for the mandatory comment in the notes, for the composition of the total of assets by items A to E and for the abridged balance sheet regime of small undertakings;

also the grand-ducal regulation of 12 September 2019 setting the standard chart of accounts, applicable to financial years beginning on or after 1 January 2020 and repealing the one of 10 June 2009, and the grand-ducal regulation of 18 December 2015 determining the form and content of the balance sheet and profit and loss account layouts.

From the Commission des normes comptables, question and answer 16/010 on the 2016 balance sheet and profit and loss account layouts, for the order of asset items A, B and C and for their application to financial years beginning on or after 1 January 2016; question and answer 17/012 on research and development costs, for the removal of the option to capitalise research costs and the retention of the one for development costs;

question and answer 24/034 on the increase of the size criteria, for the small undertaking thresholds resulting from the grand-ducal regulation of 25 October 2024. From EUR-Lex, Directive 2013/34/EU, for the write-off within five years at most where national law authorises capitalisation, for applying to formation expenses the distribution restriction laid down for development costs, and for the derogations reserved for exceptional cases to be disclosed and duly justified in the notes.

From the Guichet.lu portal, the page on the methods for preparing annual accounts, for the five-year maximum period; the page on computing the operating result of a sole trader or a transparent partnership, for amortisation over a period of one to five years at the taxpayer's option and for the fact that these costs bring no item onto the balance sheet; the page on equity financing, for the specific fixed duty of EUR 75 on company deeds and its collection by the Administration de l'enregistrement, des domaines et de la TVA;

the tax calendar, for the EUR 50 chancery duty attached to the business permit application. From the Administration des contributions directes, article 40 of the amended law of 4 December 1967 on income tax in the coordinated version it publishes, for the linkage principle and for the matching of useful lives, and circular L.I.R. no. 101 of 5 November 1985, for the list of formation expenses and for the write-off in principle over five years with a period that may be extended.

From the Chamber of Commerce, the preparatory work on the standard chart of accounts, for the content of heading 20 and for the inconsistency flagged between classifying loan issue costs under account 204 and amortising them over the life of the loan.

Four points could not be verified against an official source at this date. The primary texts first: the domains guichet.public.lu, legilux.public.lu, impotsdirects.public.lu, cnc.lu and cc.lu are blocked by the network proxy of our editorial environment, and those pages were read through indexed extracts using a search restricted to official domains; the statements above reproduce those extracts without extrapolation.

Next the number of the charge account for value adjustments on formation expenses, read on published versions and drafts of the standard chart of accounts and not on the annex to the chart applicable since financial years beginning in 2020: the article therefore cites only its class. Next the exact wording of the layout of the grand-ducal regulation of 18 December 2015, the rank of items A, B and C coming from the table of the Commission des normes comptables and from the text of the law.

Lastly the article of the income tax law that today carries the option to capitalise these costs, which no consolidated extract consulted allowed us to identify with certainty: the tax section above sticks to the linkage principle of article 40 and to the published periods. These points can be verified on legilux.public.lu, on cnc.lu and on impotsdirects.public.lu.

This article sets out the law as it stands at the date of publication and is not personalised legal or tax advice: the classification of a cost, the choice whether or not to capitalise, the write-off period retained and the effect on distributable profit depend on the available documents, on the accounting framework applied and on the company's own situation. Texts, regulations and practice change, and any decision binding your structure should be verified as at the date you rely on it. Report an error to contact@financialservices.lu: the correction is dated in the article.