Deductibility of Operating Expenses in Luxembourg

A business may deduct its operating expenses from its taxable profit, meaning the costs it incurs for the purposes of its business. Only expenses with a direct link to the professional activity qualify. Expenses incurred for the personal or private purposes of the manager are not deductible.

General Rule on the Deductibility of Expenses

The distinction is often a matter of context. For example:

• Deductible: a manager takes a client to a restaurant to conclude a professional contract. This is an operating expense.
• Not deductible: a manager invites a personal friend to lunch. This is a private expense.
• Borderline cases: where the client is also a close friend, it must be determined whether the relationship at the time of the expense was professional or private.

The amended Luxembourg income tax law of 4 December 1967 (LIR) draws the line between deductible operating expenses and non-deductible expenses:

• Operating expenses are those inherent to the activity of the business¹, such as rent, staff costs, electricity, and certain restaurant and travel costs.
• Non-deductible expenses are those incurred in the taxpayer’s personal interest or for the maintenance of their family, as well as expenses related to their lifestyle, even where these also benefit their profession².

The Two Most Frequently Contested Types of Expenses

In practice, two categories of expenses give rise to the most disputes: car and travel costs, and restaurant costs.

1. Car and Travel Costs

Car and travel costs are deductible when they are incurred exclusively for the professional activity. The burden of proof lies with the taxpayer, who must be able to show that each trip was made for professional reasons. Keeping a logbook is therefore strongly recommended.

For each trip, the logbook should record:

• The date of the trip.
• The route (departure and destination).
• The reason for the trip.
• The kilometres travelled, classified as private or professional.

Illustrative logbook layout:

The non-deductible share of vehicle costs is then calculated as follows:

Non-deductible share (%) = (private km ÷ total km) × 100

This percentage is applied to the total vehicle costs (depreciation, insurance, fuel, etc.).

Example: total vehicle costs of €12,000 with a private-use ratio of 30% give a non-deductible amount of €12,000 × 30% = €3,600. The remaining €8,400 is deductible as an operating expense.

2. Restaurant Costs

Restaurant costs are deductible only if the taxpayer can demonstrate that they were incurred exclusively in the interest of the professional activity. Case law takes the following criteria into account:

• The nature of the discussions or meetings held during the meal.
• The frequency and regularity of business meals.
• The context and location of the meal.
• The presence of third parties.

Summary

¹ Article 45, paragraph 1 of the amended law of 4 December 1967 on income tax (LIR).
² Article 12, paragraph 1 of the amended law of 4 December 1967 on income tax (LIR).
Source: Legilux