On 18 March 2026, the Luxembourg Administrative Tribunal (Tribunal administratif, No. 48905) ruled on the TP implications of an intra-group financing operated through a Luxembourg PE involving guarantees. Following a Belgian tax adjustment and a spontaneous exchange of information, the Luxembourg tax authorities (“LTA”) discovered an undisclosed guarantee under which a Luxembourg affiliate had assumed the credit risk without remuneration. The decision examines how Luxembourg must independently assess a foreign adjustment and the TP treatment of such hidden guarantee.
Facts
A Belgian resident company (“BelCo”) established a Luxembourg branch in 2007 (the “Branch”), recognised as a permanent establishment under the Belgium-Luxembourg double tax treaty. The Branch carried out intra-group financing activities and benefited from an advance tax ruling issued on 14 January 2014 with retroactive effect from 1 January 2012 (the “Ruling”), under which it could deduct notional interest on more than 99% of its interest income, leaving only a residual margin taxable in Luxembourg as an arm’s length remuneration for its routine management functions.
However, an agreement dated 8 March 2012 (the “Guarantee Letter”) provided that a Luxembourg affiliated company acting as the group’s master holding company (the “Company”) would bear the credit risk relating to the Branch’s financing activity. This agreement was never disclosed to the LTA and was only revealed following a spontaneous exchange of information by the Belgian tax authorities, which had concluded that BelCo performed no significant functions in relation to the financing activity and that the related income should be attributed to the Company.
The LTA issued amended tax assessments for the years 2012 to 2017 against the Company. Following the rejection of its administrative complaint by the LTA’s Director on 16 February 2023, the Company filed a petition before the Tribunal.
Tribunal’s decision
Rejection of the global TP adjustment
The LTA sought to attribute the entirety of the interest income generated by the Branch to the Company, relying primarily on the conclusions of the Belgian tax investigation. The Tribunal held that the LTA had not conducted its own independent analysis under Luxembourg tax law, but had instead merely followed the conclusions of the Belgian tax administration without verifying whether those conclusions were also applicable under Luxembourg law.
The Tribunal found that the LTA had failed to establish that the assumption of credit risk by the Company necessarily implied a transfer of all significant functions, powers, risks and assets relating to the financing activity and therefore refused the full reallocation of the financing income to the Company.
TP adjustment up to an arm’s length guarantee fee
The Tribunal however concluded on a partial adjustment. It found that the LTA sufficiently established that the Company had, through the Guarantee Letter, assumed a significant credit risk on the intra-group financing activity and had the financial capacity to bear that risk. Since the Company received no remuneration, the Tribunal considered that the arm’s length principle had been breached.
While a TP study was submitted by the Company itself, which expressly acknowledged that an independent party would have expected to receive a guarantee fee to assume such risk, but that the guarantee fee constituted a mere shareholder cost, or that such services were not typically remunerated during the relevant years, the Tribunal rejected this argument as either being unsupported or contradicted by the Company’s own evidence. The Tribunal therefore accepted a partial TP adjustment corresponding to an arm’s length guarantee fee.
Conclusion
The Tribunal partially upheld the petition filed by the Company by rejecting the global adjustment made by the LTA corresponding to the full amount of the notional interest deduction, but confirming that a guarantee fee reflecting the arm’s length remuneration for the credit risk assumed by the Company under the Guarantee Letter was justified. As the LTA had not determined the amount of such guarantee fee, the Tribunal remitted the matter back to the LTA to compute the guarantee fee.
Key Takeaways
- Disclosure obligations: failure to disclose agreements with direct tax implications likely triggers the application of the extended ten-year statute of limitation period.
- Findings of foreign tax authorities are relevant facts, but their legal consequences are nonetheless still subject to analysis under Luxembourg law.
- Credit risk assumption must be remunerated at arm’s length: the assumption of significant intra-group credit risk must be remunerated at arm’s length. In the present case, the Company, as the group’s master holding company, had the financial capacity to bear the credit risk assumed under the Guarantee Letter, which was a key factor in the Tribunal’s finding that an arm’s length guarantee fee was warranted.
- Partial success for the taxpayer: Luxembourg courts are prepared to scrutinise and limit TP adjustments where the LTA failed to conduct a sufficiently rigorous independent analysis. The global reallocation of income was rejected, and the taxpayer successfully limited the TP adjustment to a guarantee fee only.
- To be continued: As on the one hand the judgement itself can still be appealed by the parties and that on the other hand the matter has been remitted back to the LTA to compute the guarantee fee, the final word has not yet been said on this matter.
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