New draft bill spells major revamp of Luxembourg’s accounting law - Part 1

On 19 December 2002, we saw the Law on the register of commerce and companies and the accounting and annual accounts of undertakings (LRCS) come into force. Fast forward to July 2023 more than two decades later (not forgetting several amendments along the way), and it is the dawn of draft bill 8286 by Luxembourg’s Minister of Justice. The law covers accounting, standalone annual financial statements and consolidated financial statements of companies, as well as related reports and the repeal of the role of the ‘commissaire’ in company law. 

This draft bill brings some significant changes including terminology, scope extension, valuation methods and additional audit requirements, to name just a few. 

In this two-part series, we’ll take you through the key changes and bring you up to speed on how they will impact the world of accounting and financial reporting.

Up until now, references had to be made to the Luxembourg Commercial Code, the amended Law of 10 August 1915 on commercial companies, and Title II of the Law of 19 December 2002. Today, draft bill 8286 groups various accounting-related laws into just one single law. This means that we only need to refer to one law where standalone annual and consolidated financial statements and related reports are concerned.

The draft bill presents the future accounting law (which will be referred to as “Law of XX/XX/20XX relating to accounting, standalone annual financial statements, consolidated financial statements of companies as well as related reports”) using a bottom-up approach and a “list approach”. 

So, what does this mean? The LRCS is currently presented using a top-down approach which lays down the rules applicable to large undertakings and then provides, by exemption, what is not applicable to small and medium-sized undertakings. 

In contrast, the draft bill specifies the requirements applicable to small-sized undertakings and then adds further requirements as an undertaking grows from small to medium to large and/or lists an instrument on a regulated market. Another advantage brought by this draft bill is that, at each chapter, the undertakings in scope of the chapter are listed. This brings much-needed clarification and reduces the need for interpretation which could lead to legal uncertainties. 

The draft bill brings with it a partial transposition of a new category of undertakings: micro undertakings.

A micro undertaking is proposed to be an undertaking which, at its balance sheet date, does not exceed the limits of at least two of the following three criteria:

It should be noted that the repetition criteria apply to determine the categorization of an entity as a micro undertaking.

The introduction of this new category was mainly motivated by a willingness to reduce the administrative burden for undertakings in the commercial and industrial sector.

Micro undertakings are exempt from the preparation of management reports as well as statutory audits but must provide (i) an abridged balance sheet, (ii) an abridged profit and loss account and (iii) the below information to be provided by way of notes:

• The total amount of any financial commitments, guarantees or contingencies that are not included in the balance sheet and an indication of the nature and form of any valuable security which has been provided. Any commitments concerning pensions and affiliated or associated undertakings shall be disclosed separately.
• The amount of advances and credits granted to members of the administrative, managerial and supervisory bodies, with indications of the interest rates, main conditions and any amounts repaid or written off or waived, as well as commitments entered into on their behalf by way of guarantees of any kind, with an indication of the total for each category.
• Regarding the purchase of own shares, the reasons for acquisitions made during the financial year are to be provided; the number and the nominal value (or in the absence of nominal value, the accounting par value) of the shares acquired and disposed of during the financial year and the proportion of the subscribed capital which they represent; in the case of acquisition or disposal for value, the consideration paid; and the number and nominal value, or, in the absence of nominal value, the accounting par value, of all the own shares acquired and held in the undertaking's portfolio as well as the proportion of the subscribed capital which they represent.

It is important to highlight that the following entities cannot be classified as micro undertakings:

• a holding entity 
• a credit institution or any other undertaking subject to the supervision of the CSSF 
• an undertaking operating in the insurance sector 
• a securitization vehicle in the scope of the law of 22 March 2004 not subject to the supervision of the CSSF 
• a reserved alternative investment fund (RAIF) which, at the date of its balance sheet, does not exceed the limits of at least two of the following three criteria:

Further amendments relate to the size categorization for small undertakings whose thresholds have been increased to the maximum provided by Directive 2013/34/EU¹:

Once the law is approved, we can expect to see a number of medium-sized undertakings requalifying as small-sized undertakings which could potentially lead to a higher use of abridged forms, less management reports and a decrease in the number of undertakings subject to audits. Holding undertakings qualifying as small undertakings, however, will still be subject to additional disclosures in the notes to their standalone annual financial statements (e.g., table with details relating to some participating interests).

In the current interpretation of the LRCS, most holding entities are classified as small undertakings given the fact that they usually do not employ any staff and generate no or very little net turnover. The draft bill caters to Luxembourg specifically by introducing a category defined as large holding undertakings. 

Large holding undertakings will be undertakings that have a balance sheet total equal to or exceeding EUR500 million and whose main activity is to hold, finance or manage participating interests or similar assets held for the long term or with a view of subsequent sale. The repetition rule applies in the determination of a large holding undertaking, which means that the balance sheet total should reach EUR500 million and above for two consecutive financial years.

Large holding undertakings must:

• fulfil all the requirements applicable to small undertakings.
• provide the name and registered office of each of the undertakings in which the undertaking – either itself or through a person acting in its own name but on the undertaking’s behalf – holds a participation, showing the proportion of the capital held, as well as the amount of capital and reserves and the profit or loss for the latest financial year of the undertaking concerned for which the accounts have been approved. The information concerning capital and reserves and the profit or loss may be omitted where the undertaking concerned does not publish its balance sheet and is not controlled by the large holding undertaking.
• undergo a statutory audit carried out by a “réviseur d’entreprises agréé”. 

When a large holding undertaking meets the requirements of a medium or large undertaking, the requirements of medium or large undertakings apply and supersede the above.

Until now, CNC’s Q&As were issued as guidance and did not have any probative force of law.  The incorporation of these Q&As in the draft bill of law changes what was considered, to date, as recommendation or best practice to become word of law.

1. Avis CNC 14/003 (PDF, 0.5MB)

2. Q&A CNC 19/017 (PDF, 0.5MB)

3. Q&A CNC 19/019 (PDF, 1MB)

4. Q&A CNC 20/021 (PDF, 1MB) 

5. Q&A CNC 21/022 (PDF, 3.7MB)

6. Q&A CNC 21/024 (R) (PDF, 3.7MB)

7. Q&A CNC 21/025 (PDF, 0.5MB)

8. Q&A CNC 22/026 (R) (PDF, 05MB)

How does draft bill 8286 impact you? Do you have complex questions that need answering? Reach out to KPMG Luxembourg’s specialists who can help you adapt efficiently and seamlessly to these changes. And there’s more to come on this topic here on our blog. Don’t miss Part 2 where we’ll be taking a look at other major changes – from reporting requirements for dissolved or in-liquidation undertakings, to the definition of control.

Ruslan Tumanshin
Partner, Audit
KPMG Luxembourg
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Jerome Luxembourger
Partner, Advisory
KPMG Luxembourg
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This article was written in collaboration with Nishta Thuposy, Senior Manager.