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25 August 2021

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Luxembourg Issues Circular on Loss Carryforward Rules and Municipal Commercial (Business) Tax

The Luxembourg Administration of Direct Tax has published Circular no. 31 of 10 August 2021 from the Director of ICC contributions, which is the municipal commercial (business) tax. The circular provides guidance on the application of the loss carryforward rules in relation to the commercial tax and replaces an earlier version dated 31 October 1991.

As per amendments introduced at the end of 2016, losses incurred from the 2017 tax year may only be carried forward for up to 17 years, while losses incurred during the period from 1 January 1991 and 31 December 2016 may continue to be carried forward indefinitely. For commercial tax purposes, the circular provides a reminder that operating profit is equal to the profit determined according to the Income Tax Law increased by certain additions and reduced by certain deductions as provided for under Section 8 and 9, respectively, of the Commercial Tax Law. As such, it is possible that a negative result (loss) for income tax purposes in a year may be a positive result for commercial tax purposes, or vice versa, which must be considered in applying the loss carryforward rules. The circular also notes that deduction of losses incurred during previous years is subject to the condition that regular accounts were kept during the years the losses were incurred. Further, it is clarified that older losses are to be deducted first and, in particular, losses allowed indefinite carryforward (losses before 2017) are given priority for deduction over those subject to the 17-year limit.

In addition to addressing the application of the loss carryforward rules, the circular also addresses the deduction of social security contributions for commercial tax purposes by sole proprietors and partners in a partnership. This includes clarification that such contributions are considered personal expenses that are deducted after the determination of operating profit and, as such, an operating loss and its possible carryforward are not affected by the deduction of social security contributions. Further, it is clarified that only social contributions that are actually paid during a relevant tax year are deductible for that tax year. In other words, such contributions may not contribute to the amount of an operating loss and such contributions in a loss year may not be carried forward for deduction in future years.

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