What qualifies as an expense report?

Luxembourg taxation allows companies to deduct certain expenses from their tax balance. These are called operating expenses or sometimes representation expenses. What do they correspond to? For what amounts and under what conditions? myLIFE studies these questions for you.*

What are we talking about?

Under the label operating expenses or representation expenses, we find all costs incurred in the interest of the company, meaning expenses relating to its activity and the generation of revenue.

These costs must therefore serve the direct and exclusive interest of the company and not personal interests. These expenses must also fall within a proven commercial or business development approach.

For companies, these expenses are deductible from the taxable result, in accordance with Article 45 of the amended law of 4 December 1967 on income tax. This legal framework describes the general principles of deductibility of professional expenses and operating charges.

Which expenses?

Here are the main costs that companies may include within the scope of operating expenses:

• • transport costs (fuel, tolls, mileage allowances…)
  • travel expenses (plane tickets, train tickets…)
  • business meals (meals with business partners)
  • food expenses (individual meals)
  • accommodation expenses (hotel rooms…)
  • IT and telecommunication expenses (internet, telephone)
  • reception and representation expenses (coffee machine, water…)
  • representation expenses (suit, pair of shoes…)
  • documentation expenses (books, museum entrance…)

Practical application

Let’s take a concrete example: after several months of collaboration, an entrepreneur wishes to invite his client, as well as all employees or contractors who were involved in the project, to lunch at a restaurant. The bill resulting from this meal may be entered as an operating expense and thus be taxdeductible.

Conversely, if the meal takes place in a strictly private context, meaning it is not directly linked to a business relationship, it will not fall within the scope of the expenses we are describing today.

Entering a private expense as an operating expense is illegal and may result in a tax adjustment.

Entering a private expense as an operating expense is illegal and may result in a tax adjustment.

Under what conditions?

To be deductible from a company’s tax balance, these costs must meet three cumulative criteria:

• • Professional necessity
  • Proportionality with respect to the company’s activity
  • Rigorous documentary justification of the expenses

Let’s detail each of these criteria more concretely.

Professional necessity

As its name already suggests, this aims to establish a qualitative correspondence between the expenses and the activity in question.

Let’s take a telling example. If you are an editor, an independent journalist, or a freelancer, entering the purchase of a voice recorder, a dictionary, notebooks and pens, or a computer as your operating expenses seems entirely necessary. Let’s go further: if you are working on a topic related to metallurgy, for example, the purchase of books on this subject seems if not logical, at least coherent.

Conversely, the purchase of 2 kilos of white truffles will be much less so… even if you are working on a gastronomic topic—let’s be serious.

Proportionality

The second criterion establishes a quantitative correspondence between the expenses incurred and the activity in question.

Let’s return to the example of our editor who, working alone, can reasonably justify the purchase of one or two computers every two years, but not 15 computers each year.

And why not three or four computers if their use is justified?! The assessment of needs is based on common sense and consistency with professional use. The Luxembourg Tax Administration does not set a precise ceiling, but specifies that expenses must not present a sumptuous or excessive character.

Rigorous justification

Finally, the last criterion is entirely objective, as it establishes a correspondence between the expenses incurred and their documentary justification.

To put it simply: if you have lunch at a restaurant with a client, ask for a receipt when paying the bill, and forward it to your accountant or to the administration when filing your tax return.

No deduction can be granted without a supporting document such as an itemized invoice or till receipt. Moreover, this document must always mention:

• • The nature of the expense (business meal)
  • The date and place
  • The professional purpose (client name or project)
  • The persons present

In case of an audit?

Any company may be audited by the Tax Administration to verify whether the deductions claimed correspond to actual expenses and whether these are not inconsistent from both a qualitative and quantitative standpoint.

All undocumented expenses, or those considered sumptuous or excessive, will not be taxexempt and will therefore be reintegrated into the company’s taxable result. Finally, a reclassification of these expenses as benefits in kind would occur for the beneficiary in question. Consequently, these expenses would be subject to social security contributions and income tax payable by the company.

Whether you are a selfemployed entrepreneur, the head of an SME or a large group, or even an employee, these operating expenses concern you more or less directly. Understanding how operating expenses and their tax deduction work allows you to act with transparency and serenity while respecting legal obligations.

* Content translated from French by the BIL GPT AI tool