On 11 February 2026, the Luxembourg Lower Administrative Tribunal ("Tribunal") (No. 47018) ruled on the existence of an abuse of law within the meaning of §6 of the Luxembourg tax adaptation law (Steueranpassungsgesetz - "StAnpG").
Facts
A Luxembourg private limited liability company ("Company A"), newly incorporated, was involved in a series of intra-group transactions carried out between 26 and 27 May 2015 as part of a group restructuring.
On 26 May 2015, a group company ("Company B") contributed to Company A a receivable it held against its sole shareholder ("Company C"), the fair market value of which exceeded its nominal value. In consideration, Company A issued tracking shares, the value of which was expressly linked to the underlying receivable. On 27 May 2015, Company A contributed the same receivable to Company C in exchange for newly issued tracking shares. This transaction resulted in the extinction of the receivable by confusion, as Company C became both creditor and debtor. On the same day, Company A sold the tracking shares it held in Company C to its parent company ("Company D") for a price corresponding to the value of the receivable prior to its extinction, thereby realising a significant capital loss. The valuation report dated 22 May 2015 indicated that the fair market value of the tracking shares was directly linked to the value of the underlying asset, namely the receivable that was subsequently extinguished.
The transactions were carried out between entities of the same group over a very short period of time. Company A for example held the receivable for one day only.
Following a tax audit, the Luxembourg tax authorities ("LTA") issued tax assessments for the year 2015 denying the deduction of the capital loss on the grounds that the transactions constituted an abuse of law within the meaning of §6 StAnpG. The Company’s administrative complaint was rejected by the Director of the LTA, leading the Company to file a petition before the Tribunal, which ultimately upheld the LTA’s position.
The decision of the Tribunal
Legitimate expectations
The Company argued that the absence of any objection from the LTA during discussions held prior to the implementation of the restructuring gave rise to a legitimate expectation that the loss would be recognised for tax purposes.
The Tribunal rejected this argument. It recalled that, since 1 January 2015, the legislator has formalised the advance tax ruling procedure through §29a of the Luxembourg General Tax Law (Abgabenordnung - "AO"). As a result, the principle of legitimate expectations can only apply within this legal framework. The Company had deliberately chosen not to seek a formal advance tax ruling and could not therefore validly invoke any legitimate expectation arising from informal discussions.
Moreover, the Tribunal noted that the information provided evolved between the initial meeting and subsequent exchanges. Accordingly, Company A could not reasonably claim that the tax authorities had validated a transaction not presented in its final form at the time of the initial discussions.
Abuse of law - § 6 StAnpG
The Tribunal assessed the four cumulative conditions required to establish an abuse of law:
Use of private law forms or institutions
The parties did not dispute that Company A had made use of private law forms and institutions. This first condition was considered to be met.
Tax savings
The Tribunal found that the deduction of the loss would have reduced the Company's taxable base and generated a tax loss carry-forward, which Company A had notably used in 2016. The Tribunal again expressly clarified that §6 StAnpG does not require the tax saving to meet any minimum threshold, whether in absolute or relative terms. The argument that the tax saving was negligible in the context of the group's overall financial activities was accordingly dismissed.
Use of inappropriate means
The Tribunal noted that the receivable had been transferred in a purely circular manner, from Company B to Company A, and then from Company A to Company C, before being extinguished by confusion in Company C's hands. The tracking shares received in exchange were expressly linked to the value of an asset that was already intended to be extinguished. The Company could not have been unaware, at the time of the contribution, that the value of the tracking shares it was receiving would be almost immediately wiped out, as reflected in the transaction documentation, including the board minutes and contribution agreements.
The Tribunal also rejected the argument based on the principle of attachment of the tax balance sheet to the commercial balance sheet (Article 40 of the Luxembourg Income Tax Law - "LITL"). A transaction that is perfectly valid from a legal and accounting standpoint may nonetheless constitute an abuse of law, particularly where it is designed to exploit the attachment principle whilst circumventing other fundamental tax principles, such as the arm's length principle and the non-deductibility of hidden profit distributions.
The Tribunal accordingly concluded that the loss arose from the use of inappropriate means, as the legislator cannot reasonably be regarded as having intended to allow the deduction of a loss generated by a series of purely circular and intra-group transactions.
Absence of valid extra-fiscal justification
On the burden of proof, the Tribunal recalled that the State is limited to render plausible the absence of any economic justification for the structure chosen. It then falls to the taxpayer to demonstrate real and sufficient extra-fiscal reasons. It is not sufficient for the taxpayer to simply invoke economic reasons. Those reasons must be genuine and must present an economic advantage, beyond the mere tax benefit obtained.
The Company put forward three extra-fiscal justifications:
- Increase in distributable reserves: No evidence was provided to support an increase at the level of Company A and the Tribunal found that Company A failed to establish that the restructuring was necessary or justified to achieve that result, or that more direct means were not available.
- Elimination of foreign exchange risk: The Tribunal acknowledged that the contribution of the receivable had eliminated the currency risk attached to the receivable. However, this objective was insufficient, on its own, to justify the overall structure, which was primarily a complex arrangement of circular transactions whose legal effects were largely neutralised.
- Elimination of upward, reciprocal and cross-shareholdings: The Tribunal noted that it was the earlier steps of the restructuring that had themselves created the cross-shareholdings and latent losses in the first place, which does not constitute a valid extra-fiscal justification. This argument only corroborated the artificial nature of the arrangement: the overall structure was devoid of genuine economic substance.
All three justifications were rejected, and the fourth condition required for the abuse of law was accordingly found to be met.
Key takeaways
This decision provides another useful guidance on the application of § 6 StAnpG:
- Circular intra-group transactions: a series of intra-group transactions involving the transfer and subsequent extinction of an asset within a short period, combined with the realisation of a capital loss, may indicate an artificial arrangement.
- No minimum threshold for tax savings: §6 StAnpG does not require the tax advantage to be material.
- Accounting regularity is not a shield against abuse of law: a transaction may be valid from a legal and accounting perspective and still be disregarded for tax purposes where it constitutes an abuse of law. Article 40 LITL does not prevent the application of §6 StAnpG.
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