Luxembourg: Luxembourg tax authorities release circular on the use of a foreign functional currency for tax purposes

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Luxembourg: Luxembourg tax authorities release circular on the use of a foreign functional currency for tax purposes

merle.jpg

Samantha Merle

In a recent circular, the Luxembourg tax authorities defined the rules applicable upon request to undertakings with a share capital and accounts in the same foreign currency, which wish to determine their taxable income by simply converting their commercial result in foreign currency into EUR. The release of this circular is motivated by the fact that strict application of the Luxembourg valuation rules to these undertakings may in certain cases create artificial taxable exchange profits, which appear when preparing a tax balance sheet in EUR and thus do not reflect the economic reality. To avoid this kind of situation, the tax authorities have defined the rules and conditions to apply the foreign functional currency for tax purposes. We present the main aspects. The possibility to use the functional currency applies, upon request, to undertakings with share capital and accounts in the same foreign currency. Once an undertaking has opted for the regime, it will have to use its functional currency as long as its share capital remains denominated in this currency. A request has to be filed with the Luxembourg tax authorities at the latest three months before the end of the tax year in which the undertaking intends to benefit from the regime (September 30 at the latest, if the tax year corresponds to the calendar year).

The commercial result in foreign currency is increased by the amounts which are not tax deductible for tax purposes (in foreign currency), decreased by the amounts exempt (in foreign currency as well) and then converted into EUR based on exchange rates determined by the European Central Bank. The taxpayer can choose between the year-end rate or the average rate of the year. Once the choice has been made, the taxpayer will have to apply the rate chosen to all future tax years. This exchange rate will apply to all amounts in foreign currency as well as to tax losses of previous years which are carried forward and will be converted at the rate of the tax year for which they are taken into account. The determined amounts in EUR are then reported in the tax returns of the undertaking and the related tax assessments issued by the tax authorities are in EUR as well.

To check whether a shareholding qualifies for the participation exemption regime according to which dividends, liquidation proceeds and capital gains can be exempt under certain conditions, the value of the participation (which must reach a certain value in EUR for the exemption regime to apply) has to be converted into EUR by using the historical exchange rate (the rate as of the date of acquisition of the participation). This approach is justified, as the participation might otherwise qualify for the participation exemption regime in one tax year and no longer qualify in another, if the exchange rate varies significantly from one year to another.

To determine the amount of minimum CIT due by Luxembourg companies, reference has to be made to the total balance sheet, converted into EUR by using the exchange rate applicable to the related tax year (year-end exchange rate or average rate of the year).

Lastly, the circular clarifies the rules applicable for municipal business tax (MBT) and net wealth tax (NWT) purposes and the implications on the determination of the amount of NWT reduction, which is available under certain conditions to taxpayers. Furthermore, it expands on the rules which will apply during the transitory year for a taxpayer who until now has prepared a tax balance sheet in EUR and now opts for the future use of the functional currency for tax purposes.

Samantha Merle (samantha.merle@atoz.lu)

ATOZ – Taxand Luxembourg

Tel: +352 26 940 235

Website: www.atoz.lu

more across site & shared bottom lb ros

More from across our site

The ruling is ‘well-structured’ in its references to the OECD TP guidelines, one expert says, while another argues it overlooks key technical issues
India also brokered its first-ever multilateral APA last year, the Central Board of Taxes announced
A global tax framework may not materialise anytime soon, but a common set of principles is becoming increasingly necessary, Rudolf Winkenius also tells ITR
Kingsley Napley’s claimants are arguing that taxing the provision of education breaches the European Convention on Human Rights
While pillar two can progress without the US, it won’t reach the same heights without American involvement, argues Renáta Bláhová, founding partner of BMB Partners Taxand
There are unanswered questions as to how foreign investors could reclaim money via tax credits, advisers suggested
Amid an ever-changing tax environment, India’s advisory market is bustling with competition ahead of the 2025 World Tax rankings and ITR Awards
The deal comes after PwC had accused Paul McNab of using confidential information; in other news, McDermott hired a new London tax head from a US rival
Looking at transfer pricing simplification is “obviously helpful”, but it should be done in line with current standards, a senior government figure reportedly said
The UK Government’s plans to close the tax gap via increased HM Revenue and Customs investment have failed to impress local tax advisers
Gift this article