Luxembourg is undertaking a substantial re-working of its accounting law, the legislation setting out requirements for corporate record-keeping and reporting. Guided by the European accounting directive, the effort is to modernise and streamline the law, and align it with current common market practices, better reflecting the profile of Luxembourg’s businesses. SCSp partnership vehicles, often used for funds, and firms with more than 500 million euro on their balance sheets now face additional requirements.
Accounting experts expect this vital update to make compliance with the still-complex law more straightforward and build confidence in Luxembourg as a place to do business, especially for new arrivals.
“For commercial companies, it’s really difficult to see where all the accounting provisions are,” said Caroline Nicoletti, director of EY Luxembourg’s IFRS & LuxGAAP desk. She explained that the 1915 law sets out legal aspects and consolidation requirements. There’s also a more recent law from 2002 setting out provisions for preparing and presenting annual financial statements.
Additional layers
On top of that, she said, is the commercial code (code de commerce). Financial companies are also guided by the sectoral or product laws – for reserved alternative investment funds - Raifs, investment companies in risk capital – Sicars and specialised investment funds – Sifs etc. Another law governs listed companies.
“The legislator wanted to harmonise all these things and try to have a single place where we can find all the requirements,” said Nicoletti.
This was ultimately difficult to achieve, with responsibility for accounting split between two ministries – finance and justice. The finance ministry oversees banking and other financial and professional aspects, while the justice ministry oversees commercial company law.
More achievable goals
The other main objectives – modernisation and transparency – were more achievable. “We need to have a law which is better articulated, that it represents best practices to be applied by the company,” she added. To align accounting with the market practice and be a bit more transparent.”
According to an EY report, a major area of criticism is the 2002 law’s presentation on annual financial statements, which is based on a top-down structure. It was written to focus primarily on large-sized companies. This forced a practice of “derogation, exemptions and waivers”. “Considering that a very large majority of Luxembourg companies are small-sized companies”, this “proves not to representative of the Luxembourg market.”
Inspiring confidence
“We need to convince the investor, the stakeholders that Luxembourg is a financial centre in which you can have confidence.”
Increased transparency is a major organising principle of this revision, she said. First of all, she pointed to the increased scope of entities subject to bookkeeping and the preparation of annual accounts. Civil companies, for example, will now have a real accounting framework, she said, and “will now be in the scope of the accounting provisions.” The law also changes the treatment of common funds
“Now it’s clear, it’s written in the law, they are in the scope of the accounting law.” she explained.
Increased data collection
More transparency is also about more data collection, which she said is why civil companies are in the scope of the law, along with SCSp’s, with certain exceptions.
“The administration really wants to get data from these entities, because there are more and more vehicles where both the administration and National Institute of Statistical and Economic Studies of Luxembourg don’t really know what they are doing.”
Nicoletti stated that S.C.S.p.s’ lack of transparency doesn’t trouble her, since they are run by financial professionals.
Filing requirements may vary
She explained that the S.C.S.p.s are being treated differently depending on how they’re regulated. SCSp’s regulated by the CSSF, such as SIFs and SICARs, are required to prepare financial statements under local accounting standards (LuxGAAP or IFRS). Others weren’t required to file anything. The new law clarifies that they have to file either their financial statement or a PCN.
This PCN filing, Nicoletti explained, is a standard chart of accounts where you list the balance of the accounts your company uses at the financial year-end.
The new law will also impose a requirement for a company’s liquidator to file intermediary accounts, as a form of market protection.
Holding companies face audits
Large holding companies with a balance sheet of over 500 million euros will be subject to an audit under the new law. Nicoletti explained. In the past, many were not audited because they were small and had little or no turnover. “The legislators wanted to make sure that we also have these more risky profiles audited.”
While reporting requirements have been much discussed in Luxembourg, Nicoletti doesn’t see the legal reform adding to them.
The new accounting law still faces an extended legislative process before it becomes part of national law. EY anticipates it to come into effect by the end of 2024 or in 2025. A parallel process will see the OECD BEPS provisions implemented into national law.