In general, any interest paid by a Luxembourg company to one of its creditors is deductible from the taxable base of this company. If it pays interest relating to a loan taken out with a bank or any other creditor, it will be able to deduct the interest from its taxable base.(subject to the limitations of deduction of interests recently enacted by the Atad 1 and atad 2 directives)
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Flexible financial instruments
Here are the different financial instruments typically used by companies:
Bonds issued by companies represent an effective means of financing. Indeed, bonds constitute long-term debts. They are negotiable and allow their holder to receive fixed (or variable) interest.
"Zero-coupon bonds" do not grant any interest, but they concede, at their term, a redemption premium to their bearers.
"Term bonds" grant an interest payment in one lot (in fine). This principle allows a capitalization of the interest normally paid annually.
Any interest or redemption premium paid within the context of a simple bond is deductible from the taxable base of the borrowing company.
These bonds can be composed of variable interests or rights.
The bearers of this type of bond receive fixed interest and can, according to the conditions stated in the issue contract, become shareholders of the company to which they are lending.
As soon as the bonds are converted into shares , the bearer loses the the status (legal and economical) of lender (but keeps the status of shareholder).
The fixed interest paid by convertible bonds is fiscally deductible for the company which lends.
Bonds converted into shares can sometimes be issued without granting fixed rights, insofar as the conversion option reserved to the bearer is equivalent to the interest which should have been paid.
These bonds allow their holder to benefit from part of the yearly profit and/or from the proceeds of liquidation of the borrowing company.
These bonds can grant rights to fixed interest. The participation in profit then constitutes an additional interest which is variable.
However, the interest paid by the company which borrows is not deductible from its taxable base. Indeed, this type of bond has similarities with shares; the interest paid is considered a distribution of dividends.
Equity loans remunerate the creditors according to the profit generated by the lending company. However, fixed interest can be paid in addition to the participations in profit.
Within the framework of these loans, the creditor (often a company's partner) remains a sleeping partner and is considered as a creditor of last rank. This means that in case of liquidation, he will be paid back after all the other creditors. The interest earned by the company is considered as simple loan interest and is deductible.
This type of loan generates variable interest which is not fixed according to the profits of the company but according to the return realised by an underlying asset.
PEC is a hybrid financial instrument which is considered as debt for the borrowing company and as equity for the lender.
The (fixed) interest paid by the company will be fiscally deductible.
PECs concede no voting right to the creditor who will be subordinated to all other creditors.
CPECs are PECs which are convertible into shares. The choice between PECs and CPECs will depend on the country in which the issuer and the lender are resident.
Financial Instrument |
Lender |
Borrower |
Withholding tax |
Simple bonds |
Taxable interest |
Deductible interest |
No * |
Convertible bonds |
Taxable interest – Exonerated rights of conversion |
Deductible interest |
No * |
Participative bonds |
Taxable fixed interest + profit participations dividend |
Non deductible interest |
15 % on fixed and variable interest |
Equity loan sleeping partner |
Profit participations |
No deductible interest |
15 % |
Tracker-certificate |
Taxable interest |
Deductible interest |
0 % |
PEC |
Profit participations |
Deductible interest |
0 % |
CPEC |
Profit participations + right conversion |
Deductible interest |
0 % |
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