Luxembourg interest limitation rule: article 168bis
The Luxembourg interest limitation rule is often read the wrong way round: the cap is the higher of two amounts, it bites on net borrowing costs, and tax EBITDA leaves exempt income out.
What is the Luxembourg interest limitation rule?
The Luxembourg interest limitation rule, set out in article 168bis of the income tax law, caps the deduction of a financial year's exceeding borrowing costs at the higher of two amounts: 30% of the taxpayer's tax EBITDA, or a de minimis financial threshold of EUR 3,000,000. The higher of the two is the one that applies.
The rule did not originate in Luxembourg. It transposes article 4 of Council Directive (EU) 2016/1164 of 12 July 2016, known as the ATAD directive, and entered domestic law through the law of 21 December 2018, with effect for financial years beginning on or after 1 January 2019. The tax administration published its operating manual in circular L.I.R. no. 168bis/1.
The key word is "exceeding". The rule does not bite on interest paid, but on the excess of that interest over taxable interest income received. A company paying EUR 4,000,000 of interest and collecting EUR 3,900,000 of taxable interest carries only EUR 100,000 of exceeding borrowing costs: it sits far below the de minimis threshold, whatever the size of its debt.
We regularly see the rule waved away on the basis that interest stays under three million euros, with the calculation recorded nowhere in the file. The reasoning is right with a piece missing: the threshold is compared with exceeding costs, not with gross charges, and an audit asks for the working, not the conclusion. An intragroup financing file in Luxembourg is documented at year end, not three years later.
| Item | Value | Source |
|---|---|---|
| Provision | Article 168bis of the Luxembourg income tax law | Law of 21 December 2018, Mémorial A1164 |
| Origin | Article 4 of Directive (EU) 2016/1164 (ATAD) | EUR-Lex, directive of 12 July 2016 |
| First application | Financial years beginning on or after 1 January 2019 | Parliamentary file 7318 |
| Proportional cap | 30% of the taxpayer's tax EBITDA | Circular L.I.R. no. 168bis/1 |
| De minimis threshold | EUR 3,000,000 of exceeding borrowing costs | Circular L.I.R. no. 168bis/1 |
| Combination rule | The higher of the two amounts applies | Circular L.I.R. no. 168bis/1 |
How are exceeding borrowing costs and tax EBITDA calculated?
Exceeding borrowing costs are calculated in Luxembourg as a difference: the deductible borrowing costs borne by the taxpayer, less the taxable interest income and other economically equivalent taxable revenues it receives. The definition in article 168bis, paragraph 1, number 3 reproduces word for word the one in article 2, point 2 of the ATAD directive.
Upstream, the borrowing costs of number 2 cover interest charges on all forms of debt, other costs economically equivalent to interest, and expenses incurred in connection with financing arrangements. The perimeter is therefore wider than the "interest" line of the profit and loss account: financing fees and similar charges belong in it.
Tax EBITDA, for its part, cannot be read off the annual accounts. It starts from total net income and adds back the tax values corresponding to the exceeding borrowing costs, the depreciation charged and the value adjustments deducted. One point is decisive: exempt income is excluded from tax EBITDA, because only taxable income should serve to determine the amount of deductible interest.
The cap is finally assessed year by year, within the meaning of article 17 of the income tax law. A high EBITDA in one year creates no acquired right for the next, other than through the carry-forward mechanism described below. That annual character is what makes the rule volatile for a company whose result swings from one financial year to the next.
| Concept | Content | Reference |
|---|---|---|
| Borrowing costs | Interest charges on all forms of debt, costs economically equivalent to interest, expenses incurred in connection with financing arrangements | Article 168bis, paragraph 1, number 2 |
| Exceeding borrowing costs | Deductible borrowing costs borne, less taxable interest income and other economically equivalent taxable revenues | Article 168bis, paragraph 1, number 3 |
| Tax EBITDA | Total net income, increased by the tax values corresponding to exceeding borrowing costs, the depreciation charged and the value adjustments deducted | Circular L.I.R. no. 168bis/1 |
| Exempt income | Excluded from tax EBITDA | Circular L.I.R. no. 168bis/1 |
| Assessment period | Each financial year, within the meaning of article 17 of the income tax law | Circular L.I.R. no. 168bis/1 |
Which companies fall outside the interest limitation rule?
Falling outside the Luxembourg interest limitation rule are the standalone entity and the financial undertaking, which paragraph 8 of article 168bis allows to deduct their exceeding borrowing costs in full, together with two categories of loans carved out of the base. Those two categories are loans concluded before 17 June 2016 and loans financing long-term public infrastructure projects.
A standalone entity is a taxpayer that is not part of a consolidated group for financial accounting purposes and that has neither an associated enterprise within the meaning of article 164ter, paragraph 2, nor a permanent establishment situated in a State other than Luxembourg. The definition is narrow: one foreign subsidiary, one permanent establishment outside the Grand Duchy, and the door closes.
A financial undertaking means entities regulated by a European directive or regulation. Unregulated undertakings do not fall within the definition, with the exception of alternative investment funds supervised under the applicable national law. Securitisation entities within the meaning of article 2, point 2 of Regulation (EU) 2017/2402 are among the entities covered, which matters directly in a jurisdiction where securitisation weighs heavily.
The last two carve-outs are options the directive left to Member States and that the drafters of the bill retained. Neither is presumed: both are documented contract by contract, with the conclusion date of each loan and the use made of the funds.
| Case | Effect | Main condition |
|---|---|---|
| Standalone entity | Full deduction of exceeding borrowing costs | Outside any consolidated group, with no associated enterprise within the meaning of article 164ter, paragraph 2, and no permanent establishment outside Luxembourg |
| Financial undertaking | Full deduction of exceeding borrowing costs | Entity regulated by a European directive or regulation; supervised alternative investment funds included |
| Loans concluded before 17 June 2016 | Corresponding exceeding costs out of scope | ATAD directive option taken up by Luxembourg |
| Long-term public infrastructure projects | Corresponding exceeding costs out of scope | ATAD directive option taken up by Luxembourg |
| Consolidated group escape clause | Full deduction of exceeding borrowing costs | Equity ratio at least equal to that of the group (paragraph 6) |
What happens to exceeding borrowing costs that cannot be deducted?
Exceeding borrowing costs that cannot be deducted in Luxembourg are not lost: paragraph 4 of article 168bis lets the taxpayer carry them forward with no time limit and deduct them in later years, within the limits applicable to those years. The charge is deferred, not cancelled.
The opposite movement exists too, but it is bounded. Unused interest deduction capacity, defined in paragraph 3, is the part of the 30% fraction of tax EBITDA that the exceeding costs deducted during the year do not absorb. It carries forward over the five following financial years and acts as a reserve for leaner periods.
The asymmetry is worth remembering: unlimited carry-forward for undeducted exceeding costs, five years only for unused capacity. A company that builds up unused capacity for six years before taking on debt loses the first year of the stock. That tracking does not live in anyone's memory; it lives in a dated schedule, year by year.
The illustration below is a construction of the firm, meant to show the mechanics rather than a real case. With tax EBITDA of EUR 5,000,000, the 30% fraction is EUR 1,500,000; since the de minimis threshold of EUR 3,000,000 is higher, the threshold is the cap that applies. Exceeding costs of EUR 3,400,000 therefore remain non-deductible up to EUR 400,000, carried forward without time limit.
| Item carried forward | Carry-forward period | Legal basis |
|---|---|---|
| Non-deductible exceeding borrowing costs | No time limit | Article 168bis, paragraph 4 |
| Unused interest deduction capacity | The five following financial years | Article 168bis, paragraph 3 |
| The 30% fraction of tax EBITDA | Assessed year by year, with no carry-forward as such | Circular L.I.R. no. 168bis/1 |
The consolidated group escape clause and the tax-integrated group
The escape clause in paragraph 6 lets a taxpayer that belongs to a consolidated group deduct its exceeding borrowing costs in full if it shows that the ratio between its equity and its total assets is at least equal to its group's equivalent ratio. It is one of the two approaches opened by article 4, paragraph 5 of the ATAD directive.
The demonstration is an accounting exercise before it is a tax one. Letter b) of paragraph 6 requires all assets and liabilities of the taxpayer to be valued using the same method as the one applied in the consolidated financial statements. Without readable consolidated accounts at the closing date, the clause stays theoretical: the calculation simply cannot be produced.
Two notions of group coexist and must not be confused. The consolidated group is a financial accounting notion, the one that governs the escape clause; the tax-integrated group is a tax notion, defined in article 164bis of the income tax law. The circular of 28 July 2021 specifically added guidance on applying the escape clause where the taxpayer belongs to a tax-integrated group.
On tax integration, the parliamentary work refers to the possibility of applying the limitation at the level of the companies of a group taxed under the article 164bis regime, and the filing supplement provides for information on the integrated group. We were not able to read the consolidated text of the relevant paragraph: the exact mechanics, in particular whether the EUR 3,000,000 threshold is assessed once for the group, are not asserted here.
What the interest limitation rule changes for a Luxembourg SOPARFI
For a SOPARFI, the Luxembourg interest limitation rule produces a counter-intuitive effect: dividends and capital gains exempt under the parent-subsidiary regime are excluded from tax EBITDA. A holding company that is highly profitable in accounting terms can therefore show a tax EBITDA close to zero, and watch its 30% fraction collapse with it.
The second effect runs the other way and softens the first. Exceeding borrowing costs are computed on deductible borrowing costs alone. Charges in direct economic connection with exempt income are not deductible: interest financing an exempt participation is already ruled out by another provision, and so never enters the article 168bis base. SOPARFI taxation always reads on two levels.
For an intragroup financing company, the reasoning is different again. Its interest income is taxable and is netted against its borrowing costs: a back-to-back structure with a thin margin produces very small exceeding borrowing costs, often far from the de minimis threshold. The question then moves to the remuneration of the function, and therefore to transfer pricing in Luxembourg.
In practice, the question to settle at year end is not "are we above three million?" but "which interest is deductible before article 168bis is even opened?". It is the same reflex as for the period allocation of accrued interest on intra-group loans: characterisation comes before calculation, and it is characterisation that gets argued in an audit.
How to report exceeding borrowing costs: the SURC supplement to form 500
The Luxembourg interest limitation rule is reported through a dedicated form: the supplement "Surcoûts d'emprunt encourus selon l'article 168bis L.I.R.", known as the SURC form, attached to the form 500 corporate tax return. The amounts it computes are then carried into the main return.
Two amounts travel between the two documents: field R7690, which carries the exceeding borrowing costs incurred that are not deductible, and field R7685, which carries the carried-forward exceeding borrowing costs that have become deductible. Where the taxpayer is an integrating or an integrated company, the supplement is filed with the information relating to the integrated group.
Administrative doctrine moved four times in fifteen months. Circular L.I.R. no. 168bis/1 was first published on 8 January 2021, then replaced on 2 June 2021, again on 28 July 2021 — that version adding the guidance on the escape clause in the presence of a consolidated group — and finally on 25 March 2022. It is that last version that has to be read before any conclusion.
The SURC supplement follows the corporate return calendar: the Luxembourg corporate tax return is filed at the latest by 31 December of the year following the tax year, electronically. A carry-forward of exceeding costs that is not picked up from one return to the next becomes hard to assert later: the stock is carried across, it is not rebuilt.
| Document | Purpose | Date |
|---|---|---|
| Law introducing article 168bis | Transposition of article 4 of the ATAD directive | 21 December 2018 |
| Circular L.I.R. no. 168bis/1, first version | Operating manual for the limitation | 8 January 2021 |
| Circular L.I.R. no. 168bis/1, second version | Replaces the first version | 2 June 2021 |
| Circular L.I.R. no. 168bis/1, third version | Adds guidance on the escape clause in the presence of a consolidated group | 28 July 2021 |
| Circular L.I.R. no. 168bis/1, version in force | Latest published version | 25 March 2022 |
| SURC form | Supplement to form 500, fields R7690 and R7685 | Published for each tax year |
Sources and verification
Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (authorisation 10077274). Sources were verified on 23 September 2026, the date on which every threshold, carry-forward period, definition and date cited here was cross-checked against an official public source.
The sources consulted are as follows. The Luxembourg direct tax administration, for circular L.I.R. no. 168bis/1 in its versions of 8 January, 2 June and 28 July 2021 and of 25 March 2022 (cap of 30% of tax EBITDA, de minimis threshold of EUR 3,000,000 and the higher-of-the-two rule, definitions of borrowing costs and exceeding borrowing costs, composition of tax EBITDA, exclusion of exempt income, unused interest deduction capacity carried forward over five years, unlimited carry-forward of undeducted exceeding costs, standalone entity, financial undertaking, escape clause of paragraph 6), for its newsletters of 8 January, 3 June and 28 July 2021 and of 25 March 2022, which date each version, for the SURC form and the form 500 corporate return (fields R7690 and R7685, information relating to the integrated group) and for its page on the tax integration regime. The Chamber of Deputies, for parliamentary files 7318 and 7547 (introduction of article 168bis by the law of 21 December 2018 with effect for financial years beginning on or after 1 January 2019, options retained for loans concluded before 17 June 2016 and for long-term public infrastructure, definition of the standalone entity, perimeter of the financial undertaking). Legilux, for the law of 21 December 2018 published in Mémorial A1164. Finally EUR-Lex, for Directive (EU) 2016/1164 and its article 4, and for Regulation (EU) 2017/2402, whose article 2, point 2 defines securitisation entities.
Four points could not be verified against the primary text and are therefore not asserted here. First, the consolidated text of article 168bis: the PDF files of the tax administration and of legilux are blocked by the network proxy of the drafting environment, sources having been read through indexed extracts; the paragraph numbering cited is the one used by the circular and the parliamentary work. Second, the exact mechanics of the rule under tax integration, in particular whether the EUR 3,000,000 threshold is assessed once at the level of the integrated group. Third, the effect of the non-deductible portion on municipal business tax, which no source consulted addresses explicitly. Fourth, whether a quantified tolerance applies to the ratio of the escape clause. All four can be checked on legilux.public.lu, on impotsdirects.public.lu and on chd.lu (files 7318 and 7547).
This article sets out the state of the law at the date of publication and is not personalised advice: the application of article 168bis depends on the debt structure, the consolidation perimeter and the nature of each company's income, which no article can assess. Report an error to contact@financialservices.lu: corrections are dated in the article.
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