The flat 5% rate is gone. What circular LIR no. 164/1 of 29 January 2025 says, how to justify your rate, and how to avoid a reclassification as a hidden profit distribution.
The short version. A shareholder current account records money a shareholder lends to their company, or that the company advances to them. Since circular L.I.R. no. 164/1 of 29 January 2025 replaced the 1998 version, the flat 5% rate no longer exists. The rate must now match market conditions, and you have to be able to justify it. A poorly documented debit balance can be reclassified as a hidden profit distribution.
It is one of the most ordinary lines on a Luxembourg SME balance sheet, and one of the least watched. The owner puts money into the company to get through a slow quarter, or takes money out while waiting for a dividend, and nobody writes anything down. For twenty-seven years a 1998 circular set a 5% rate that acted as a safety net. That net disappeared in January 2025. Here is what applies now.
What is a shareholder current account?
A shareholder current account tracks the money moving between a company and one of its shareholders outside the share capital. When the shareholder advances funds to the company, the account is in credit. When the company advances funds to the shareholder, it is in debit. It is neither capital nor salary: it is a receivable or a payable, with the tax consequences that follow.
The common mistake is treating the account as a personal reserve to dip into. In accounting terms it sits in class 4 of the Luxembourg standard chart of accounts, among third-party accounts, not in class 1 with equity. That distinction is not cosmetic. It says the money is owed, in one direction or the other.
Credit or debit: two very different situations
| Situation | What it means | What to watch |
|---|---|---|
| Account in credit | The shareholder has lent money to the company | Interest paid to the shareholder must stay at a market level to remain deductible |
| Account in debit | The company has advanced money to the shareholder | The company must charge market interest, otherwise the benefit granted is taxable |
In practice it is the debit balance that draws attention from the tax authorities. A company lending interest-free to its shareholder is granting a benefit. That benefit has a value, and the value cannot stay invisible.
What circular L.I.R. no. 164/1 of 29 January 2025 changed
On 29 January 2025 the Luxembourg direct tax administration published a new circular L.I.R. no. 164/1 on interest rates for shareholder current accounts, replacing the version dated 23 March 1998. The substance of the change fits in one sentence: the universal number is gone, and the arm's length principle takes its place.
When the shareholder is an individual
The old circular set a flat 5% rate. You applied it and the file was closed. The 2025 circular removes any predetermined rate. It must now reflect the conditions that independent parties would have agreed, in line with article 164 (3) of the Luxembourg income tax law.
A simplification measure survives: you may still use a rate based on the annual rate applicable to consumer credit, provided you produce evidence supporting it. The monthly interest rate statistics published by the Banque centrale du Luxembourg, which break down the rates Luxembourg credit institutions apply to deposits and loans, are a usable reference for that evidence.
The operative word is justify. Before 2025 the rate was given to you. Since 2025 it has to be demonstrated, and the demonstration is built when the advance is made, not three years later in front of an inspector.
When the shareholder is an associated enterprise
The analysis moves up a level. The circular refers to the arm's length principle in articles 56 and 56bis of the income tax law, assessed case by case. The currency of the receivable, its maturity, foreign exchange risk, hedging risk and the refinancing rate all come into play. This is transfer pricing territory, with the documentation that goes with it.
A current account sitting on your balance sheet with no agreement and no rate? We will look at what it means for you, without selling you a compliance machine.
Review my situationThe real risk: hidden profit distribution
Article 164, paragraph 3 of the income tax law targets benefits a shareholder receives that they would not have obtained without that status. A debit current account carrying no interest, whose repayment is pushed back indefinitely or eventually written off, fits that description precisely. Once reclassified, it stops being a loan and becomes a distribution, taxable in the shareholder's hands and non-deductible for the company.
What protects an SME here is not sophisticated. A written agreement, a reasoned rate, a realistic repayment date, and above all movements that match what was written. A current account that grows every year while the agreement promises repayment within twelve months contradicts itself, and the contradiction is visible in the general ledger.
What this changes in how your books are kept
A shareholder current account is not a line you check once a year at closing. That is exactly what happens in the traditional model: the accounting firm discovers the balance the following spring, too late to fix the year that just ended. The owner learns the amount and the problem at the same moment.
At Advena, the books are kept continuously in the Odoo system we deploy and configure for Luxembourg. The current account balance is readable day by day, just like cash, and interest is calculated from dated movements rather than reconstructed at year end. When a debit balance starts to settle in, the conversation happens in March, not fourteen months later. That is the point of our accounting service for Luxembourg SMEs: numbers that arrive while they can still inform a decision.
When this needs more than an SME accounting firm
Let us be clear about our limits. If your current account involves associated entities across several jurisdictions, material amounts and a genuine transfer pricing analysis, you need specialist documentation that we do not produce. We will tell you that at the first meeting rather than afterwards. For a Luxembourg SME of 1 to 50 employees whose director holds a current account with their own company, tidying this up is ordinary bookkeeping and sits inside our monthly fee.
One methodological note: this article describes a general framework in force as of July 2026. It does not replace a review of your own situation, particularly because the new regime rests on a factual assessment, meaning your own figures.
Frequently asked questions
What interest rate applies to a shareholder current account in Luxembourg?
There is no imposed rate any more. Since circular L.I.R. no. 164/1 of 29 January 2025, the rate must match market conditions. For an individual shareholder, a simplification measure allows a rate based on consumer credit rates, provided you can support it with evidence.
Does the flat 5% rate still apply?
No. The 5% rate came from the circular of 23 March 1998, which was replaced on 29 January 2025. Continuing to apply it without further justification means relying on a figure that no longer has a basis in administrative doctrine.
Is a debit shareholder current account prohibited?
No, but it must be treated as a genuine loan: a written agreement, a market interest rate and a repayment date that is actually met. Otherwise the benefit granted to the shareholder can be reclassified as a hidden profit distribution under article 164, paragraph 3 of the income tax law.
Where does the current account appear in the annual accounts?
Among third-party accounts, in class 4 of the standard chart of accounts, on the asset side if it is in debit and on the liability side if it is in credit. It does not form part of equity, even when the shareholder treats the advance as permanent funding.
Do you need a written agreement for a shareholder current account?
No single provision requires one, but it is your main piece of evidence. In an audit, a dated agreement setting the rate, the term and the repayment terms is what separates a loan from a reclassified benefit.
Related reading
- Accounting firm in Luxembourg: the complete guide for an SME
- What an accounting firm costs in Luxembourg
- Corporate tax in Luxembourg: CIT, municipal business tax and net wealth tax
- The standard chart of accounts in Luxembourg (PCN 2020)
- Filing annual accounts in Luxembourg: deadlines and late fees
Why Advena?
We keep the books of Luxembourg SMEs inside the management system we deploy ourselves, which gives you your figures in real time instead of a snapshot of last year. The monthly fee starts at €325 per month, all inclusive, with no hourly billing and no invoice outside that monthly amount. We explain the applicable rules, we do not replace tailored advice, and we say plainly when a file falls outside our scope.
Tell us where you stand and we will tell you what it costs. No phantom quotes.
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