The Luxembourg tax authorities issued a new circular on 16 June 2014, impacting companies that maintain their share capital and accounting in a currency other than EUR. Our Luxembourg MD provides the basics.

Luxembourg companies maintaining their share capital and accounting in a different currency than EUR have - until now - been required to file their tax returns in EUR, based on EUR-denominated tax balance sheets. In this tax balance sheet, the long-term assets and liabilities needed to be converted using the exchange rate prevailing as of the acquisition date, whereas the short term items needed to be converted using the exchange rate prevailing as of the closing date. Foreign exchange differences arising on conversion were taxable.

Another option for such companies was to submit a special request to the tax authorities to use the foreign currency as functional currency for tax purposes. With this option, the Company was able to prepare its full tax return in the foreign currency, and convert the fiscal result into EUR using the exchange rate prevailing as of the date of closing of the company.

The new Circular formalises the practice of using the foreign currency as functional currency for tax purposes and provides a clear framework. It states that Luxembourg companies intending to use a currency other than Euro as functional currency for tax purposes should send a written request to the tax authorities, at the latest three months before the end of the first tax year for which they would like to use the foreign functional currency (that is before 30 September for companies closing their accounts on 31 December). New entities can do so until the end of their first tax year. 

But, of course, there are caveats, namely:

  • Companies will be required to convert the fiscal result into Euro using the exchange rates published by the European Central Bank; either at the closing foreign exchange rate or at the average of the monthly foreign exchange rates during the tax year.
  • In order to avoid misuse of foreign exchange rates developments, the choice of the foreign functional currency will be irrevocable as long as the currency of the share capital remains the same.
  • Taxes are still be payable in Euro.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.