Are you concerned by the new rules on double entry bookkeeping?

If the main objective of the 2017 tax reform was to reduce the tax rate applicable to Luxembourg corporations, the law introduced in December 2016 included many other structural changes like the new concept of tax crime (“Fraude fiscale aggravée”). However, the law dated December 2016 introducing the reform also included new accounting obligations (double entry bookkeeping / accrual basis accounting methodology).

The new rules are applicable since January 1st 2018 to professional activities as those exercised by lawyers, accountants or independent directors. In September 2017, the Luxembourg tax authorities issued a circular (L.G.-A no 63) detailing the new requirements.

If double entry accounting (and the use of the accrual basis) has always been the rule for establishing the taxable profit of professionals with a turnover exceeding EUR 100.000, an exemption was available for liberal professions. The waiver of this exemption was part of the 2017 tax reform. This means that independent directors should already have adapted their books and records to the new rules since January 1st 2018 (assuming they used a simplified accounting methodology and that their turnover exceeded EUR 100.000 in 2017).

Not complying with the new legal requirements can be costly: it would give the tax authorities the possibility to challenge the taxable profit established by the professional concerned, and to estimate the taxable basis based on the authorities own assumptions.

Many Directors were easily managing the simplified accounting methodology by themselves, using simple tools (book of income and expenses, bank statements, Excel spreadsheets….). This will probably not be the case any longer and most professionals impacted by the new rules will probably need to appoint a professional accountant in order to comply with the new accounting requirements. For instance, the Circular L.G.-A specifies that accounting entries should be processed on a regular basis and that accounting software used in this process should offer the right level of security. Excel type of spreadsheets not dedicated to accounting and not protected against potential entries made after the closing of the books will not be accepted any longer by the authorities. The Circular also specifies that taxpayers will need to keep their accounting books and records available for inspection for a minimum period of 10 years.

Adopting the new rules may affect the taxable basis and the cash position of the independent directors concerned.

Recognising accrued income and expense for the first time in 2018 will most probably lead to recognise an additional taxable profit that year (the turnover related to 2018 including all invoices issued in 2018 as well as 2017 invoices paid in 2018).

Finally, as a significant portion of Directors fees is now subject to Luxembourg VAT at a rate of 17%, Directors charging fees subject to VAT should also anticipate increased funding requirements. This is linked to the fact that under the new accounting rules, independent directors will have to transfer to the tax authorities the VAT charged on invoices issued but not paid. This is especially relevant for independent Directors subject to monthly or quarterly filing of VAT returns.