On 16 June 2014, the Luxembourg direct tax authorities (Administration des contributions directes) released a circular letter L.G.-A n°60 (the "Circular") formalising the well-established Luxembourg practice of the foreign functional currency (devise fonctionnelle) and specifying the rules applicable to this system.
The Circular applies to resident companies having their share capital and keeping their books in a currency other than the euro. These companies can opt to use this foreign currency as their functional currency for tax purposes also.
In the case of a consolidated tax group (intégration fiscale), all companies forming part of the tax group have to determine their taxable basis in the same currency.
The Circular provides the possibility for companies to opt for submitting their tax return in the foreign currency but taxes will still be expressed and collected in euros.
The Circular states some principles and recalls the aim to prevent companies from having foreign exchange differences:
Luxembourg companies willing to declare their taxable income in a foreign currency must send a written request to the direct tax authorities. That request must be made at the latest three months before the end of the first tax year for which the option for the foreign currency is required. For companies being in their first tax year, the request may be made at any time but before the end of that first tax year. The Circular specifies the details to be stated in the request;
the option to exercise the foreign currency is binding for all subsequent tax years as long as the company's share capital is expressed in that foreign currency;
the conversion from the foreign currency into euro (or vice-versa) must only be done on the basis of the exchange rates published by the European Central Bank;
the conversion of the taxable basis from the foreign currency into euro may be made either at the closing foreign exchange rate or at the average foreign exchange rate for the tax year concerned. That choice is irrevocable and binding for all subsequent tax years. For that moment, Luxembourg taxpayers willing to establish the conversion have to fill out an annex to the tax return ; and
taxes still have to be paid in euros and tax assessments will continue to be issued in euros.
Specific provisions regarding tax credits, net wealth tax and municipal business tax exist.
