On 10 August 2021, the Luxembourg Tax Administration issued an administrative circular ICC No.31 (the “Circular”) providing further clarifications in respect of the treatment of loss carryforwards in the field of municipal business tax (“MBT”).
Paragraph 9bis of the Municipal Business Tax Law (the “MBTL") regulates the carryforward of losses for MBT matters and determines the conditions under which operating losses recognized during previous fiscal years are to be deducted from a Luxembourg taxpayer’s taxable basis realized during a given fiscal year.
Paragraph 9bis of the MBTL was replaced, with effect from the 2017 tax year, by Article 4 of the law of 23 December 2016 (implementing the 2017 tax budget reforms) to align with the provisions concerning the carryforward of losses for corporate income tax (“CIT”) currently foreseen under article 114 of the Income Tax Law (“ITL”). As a result, the operating losses which are incurred from the 2017 tax year can no longer be carried forward indefinitely both for CIT and MBT purposes.
Limit in time
The Circular reiterates that, according to paragraph 9bis of the MBTL, the operating profit incurred by a Luxembourg taxpayer (the amount of which is positive) is to be reduced by the amount of the tax losses observed during previous fiscal years by application of paragraphs 7 to 9 of the MBTL as long as such tax losses could not be used before. Paragraph 9bis of the MBTL restricts the tax deduction of losses over time by providing that only tax losses realized during the previous 17 fiscal years are deductible from operating profit for a given fiscal year.
Paragraph 9bis of the MBTL makes the deduction of tax losses incurred during a previous fiscal year subject to the condition that the operator (exploitant) has kept regular accounts during the fiscal years in which the tax losses occurred.
Paragraph 9bis of the MBTL foresees that the oldest tax losses are to be deducted first for MBT purposes. Tax losses, for which the deferral period is unlimited in time, are therefore deducted as a priority over those that fall under the limitation of 17 fiscal years.
Treatment of personal social contributions
Additionally, the Circular specifies that personal social contributions incurred by an individual operator (exploitant individuel) or by a co-operator (co-exploitant) of a partnership are to be considered as private expenses. Hence, such expenses should not be taken into account for the determination of operating profit in accordance with the provisions of ITL. Similarly, the Circular also specifies that personal social contributions do not constitute deductible expenses within the meaning of paragraph 9 of the MBTL. Consequently, their related amount should in principle have no influence on the operating profit within the meaning of paragraph 7 of the MBTL. Indeed, personal social security contributions are to be deducted in accordance with paragraph 11, subparagraph 2 of the MBTL after the determination of the operating profit and hence not allowing for any potential loss carryforwards for MBT purposes.