Non-deductible expenses in Luxembourg: the list

What are the non-deductible expenses in Luxembourg?

The non-deductible expenses in Luxembourg are those the income tax law refuses to charge against profit: the standard-of-living expenses, the gifts and the fines of its article 12 for every taxpayer, and then, for companies, corporate income tax, net wealth tax, municipal business tax and director fees, which its article 168 adds to them.

The starting point, however, is not the list of refusals but the definition of the admitted charge. Article 45 deducts only operating expenses caused exclusively by the business, and a note of the Luxembourg direct tax administration on article 168bis restates it: whatever is neither caused exclusively by the business nor incurred directly in order to acquire, secure and preserve receipts is not an operating expense. That filter applies before any named list.

The lists then overlap rather than replace one another: article 12 for every taxpayer, article 168 for collective bodies, then article 45, paragraph 2 for costs linked to exempt income, article 164, paragraph 3 for hidden distributions and article 168bis for exceeding borrowing costs. One expense can be refused by several provisions, which changes the justification to be produced, not the amount.

We regularly see returns where the add-back was done from memory, on the most visible items — net wealth tax, fines — leaving director fees and costs linked to exempt participations aside. The gap is invisible in the annual accounts, which remain correct: it shows up in the tax assessment. It is one of the first things we go through as a licensed accountant in Luxembourg.

Which expenses does article 12 rule out for every business?

Article 12 of the Luxembourg income tax law rules out expenses that are deductible neither within the categories of net income nor from total net income. Three of its numbers come up in every corporate file.

The first covers expenses incurred in the interest of the taxpayer's household and for the maintenance of the family, as well as those arising from the taxpayer's economic or social standing; they remain non-deductible even where they also benefit the profession. A circular of the administration adds the apportionment rule: failing an easy and clear separation between private and professional use, the entire expense is treated as non-deductible. There is no convenience pro rata.

The second rules out gifts, donations and subsidies, and treats as such certain allowances paid to persons who, being in need, could claim support under the Civil Code. The gift then changes door: paid in cash to a body recognised as being of public utility and listed in the schedule of the direct tax administration, it is deducted as a special expense from 120 euros a year, within a limit of 20% of total net income and of 1,000,000 euros.

The fourth covers criminal and administrative fines alike, confiscations, settlements and other penalties imposed for failing to comply with legal or regulatory provisions, even where they bear an economic link to net income. The corporate return gives it its own line, "Fines within the meaning of article 12, number 4 L.I.R.": a late-filing surcharge or an order fine are added back in full.

Why are corporate income tax, net wealth tax and municipal business tax not deductible?

The three personal taxes of a Luxembourg company are not deductible: article 168 of the income tax law places corporate income tax, net wealth tax and municipal business tax among the non-deductible expenses, so they are added back to the book result.

The dividing line, as Guichet.lu sets it out, opposes real taxes, which are deductible, to personal taxes, which are not. Municipal business tax has in fact changed sides: its non-deduction for taxpayers subject to corporate income tax was introduced by the law of 21 December 2001, and a municipal business tax circular of 12 September 2003 places the taxes concerned from the 2002 tax year onwards. For a sole proprietorship, it remains an operating expense.

The consequence is budgetary and counter-intuitive: one euro of personal tax costs one euro, with no tax saving in return, which rules out reasoning on an after-tax result to estimate next year's charge. The real burden is read on the aggregate rate set out in our article on the corporate income tax rate.

A neighbouring item deserves the same attention: withholding tax on investment income, to which the return gives a separate line, alongside net wealth tax, municipal business tax and an "Other non-deductible taxes" heading. These lines do not duplicate one another, and grouping them into a single item makes the return impossible to check without going back to the accounts.

Are director fees deductible, and day-to-day management pay?

Director fees allocated to the directors and supervisory auditors of a Luxembourg company are not deductible for the company that pays them, whereas the remuneration paid to directors for day-to-day management constitutes deductible salary. The distinction turns on the function, not on the title.

The direct tax administration defines director fees as the indemnities remunerating the activity of directors, supervisory auditors and persons carrying out similar functions, and its page on non-deductible operating expenses ties them to the supervision of the collective body. One and the same director may therefore receive two flows of a different nature; it is the resolution of the competent body and the contract that separate them, not the wording of the transfer.

The director fee also bears a withholding tax of 20% of the gross amount allocated, with no deduction whatsoever, declared on form 510 bis. The two effects add up: the company does not deduct the charge and it advances the recipient's tax. The full regime, including for a non-resident director, is covered in our article on withholding tax on director fees.

We regularly see the opposite mistake to the one you would expect: not director fees deducted by inadvertence, but day-to-day management pay added back out of caution, because the recipient also sits on the board. That caution costs tax that was not due.

Why are costs linked to exempt income not deductible?

Costs economically connected with exempt income are not deductible in Luxembourg: article 45, paragraph 2 of the income tax law states it without condition, and article 166, paragraph 5 applies it to the exempt participation income of a Luxembourg parent company.

This is the rule that surprises holding companies most, because it is the price of the exemption. Guichet.lu puts it plainly: the costs relating to that exempt income, interest, management fees or write-downs, in principle lose their deductible character. A note of the administration on article 168bis treats financial charges as being in direct economic relation with the participations they finance.

The order of operations matters, and it is often reversed in the files we take over. A charge already set aside by article 45, paragraph 2 no longer has to be tested against the 30% of tax EBITDA cap of article 168bis, which carries a de minimis threshold of 3,000,000 euros: it left the result before that test.

Tracking costs participation by participation is the only way to make the rule workable: without allocating interest and fees to the participation they serve, the add-back becomes an estimate, and an estimate does not hold up on audit.

Hidden profit distributions and thin capitalisation: the costliest refusal

A hidden profit distribution is, within the meaning of article 164, paragraph 3 of the income tax law, the advantage a shareholder receives directly or indirectly from a Luxembourg company and would not normally have obtained without that capacity. The advantage is added back to the profit.

The mechanism is heavier than a plain non-deduction, because it operates twice: the charge is refused at the level of the company and the same amount is taxed in the hands of the recipient. Circular L.I.R. no. 104/11 of 20 November 2014 specifies that those advantages are investment income and not employment income, and that the corporate tax office informs the shareholder's tax office. It also sets the measure: the usual average price is the one the recipient, and not the payer, would have had to spend.

The examples are old and still current: a 1978 circular cited the excessive remuneration allocated to the shareholder-manager and the excessive rent allocated to the owning company. The shareholder current account with no market rate and no dated agreement is its contemporary vehicle.

Thin capitalisation is its financial variant. Guichet.lu recalls the generally accepted 15/85 ratio: the assets held must be financed at least 15% by equity and at most 85% by debt, equity meaning the paid-up capital, the share premium and the reserves and retained earnings. Beyond that, the excess portion of the debt may be recharacterised as a contribution and the corresponding interest as a hidden distribution. No ratio applies where the loan comes from a third party, typically a bank.

How do you move from the book result to the tax result?

Moving from the book result to the tax result of a Luxembourg company means adding the non-deductible expenses to the result for the year, then subtracting exempt income and the carry-forwards allowed. That is the work form 500 gives shape to.

The form carries dedicated lines, and reading them is the best summary of the subject: ineligible or excessive depreciation or provisions, expenses incurred for religious, charitable or general interest purposes, fines within the meaning of article 12, number 4, remuneration to directors, net wealth tax, municipal business tax, withholding tax on investment income, other non-deductible taxes, then the interest and royalties that are non-deductible under article 168, number 5.

Two lines call for a word more. Excessive depreciation refers back to article 29, paragraph 2: the total of depreciation and write-downs may not exceed the acquisition or production cost less the estimated residual value. Article 168, number 5 refuses the interest and royalties owed to an associated collective body established in a country listed in Annex I of the European Union list of non-cooperative jurisdictions, where three conditions are cumulatively met; it comes from the law of 10 February 2021, with effect from 1 March 2021.

The return itself, its annexes and its deadline are detailed in our article on form 500. The advice we give on assignments is to build that table during the closing, item by item: the supporting document for a mixed expense is far easier to assemble three months after the year end than a year later.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (permit 10077274). The legal references, rates and thresholds in this article were verified on 15 October 2026 against the official sources below.

From the Luxembourg direct tax administration, the A to Z pages on non-deductible operating expenses, for the extension of the list to collective bodies, the statutory obligations, the three personal taxes and the fees of directors and supervisory auditors; on director fees, for their definition, their non-deduction for the payer and the 20% withholding on the gross amount with no deduction whatsoever; on gifts and donations, for the annual minimum of 120 euros and the cap of 20% of total net income and of 1,000,000 euros.

Then municipal business tax circular no. 37 of 12 September 2003, for the law of 21 December 2001 and the 2002 tax year; circular L.I.R. no. 104/11 of 20 November 2014, for the investment income qualification and the usual average price; circular L.I.R. no. 66 - I.C.C. no. 24 of 3 October 1978, for the excessive remuneration and rent; the notes on article 168bis; circular L.I.R. no. 168/2 of 31 May 2022;

the coordinated text of the law of 4 December 1967, for articles 12, 29, 45 and 168; the form 500 lines and form 510 bis. From Guichet.lu, the factsheets on the operating result of a company limited by shares and of a sole proprietorship, on debt financing and on the parent-subsidiary regime. From Legilux, the law of 10 February 2021.

Three points could not be verified against an official source at that date. First the numbering of points 1, 3 and 4 of article 168 in the coordinated text in force on 1 January 2026: the documents consulted attach director fees and the taxes to that article without our having been able to read it number by number, so we assign no number to those families.

Next the continued presence, in the 2025 form 500, of the line on expenses incurred for religious, charitable or general interest purposes, confirmed only in an earlier version. Last the current version of Annex I of the European Union list. These points can be checked against the coordinated text of the administration, the form for the year concerned and the A to Z page devoted to that list.

This article sets out the state of the law at the date of publication and does not constitute personalised tax advice: the qualification of an expense depends on the facts, the supporting documents and the legal form of the company. Rates, thresholds and lists change, and any decision committing your structure should be verified at the date you rely on it. Report an error to contact@financialservices.lu: the correction is dated in the article.