In a judgment of 20 May 2026 (No. 48972), the Lower Administrative Court (Tribunal administratif, the “Tribunal”), Fifth Chamber, overturned a decision of the Direct Tax Administration (the “DTA”) and ruled that debts recorded by a Luxembourg subsidiary under a private-law tax-sharing agreement can be deducted from its business assets for net wealth tax purposes.
Tax consolidation and net wealth tax
Under Article 164bis of the Luxembourg Income Tax Law (the “LITL”), Luxembourg companies can join a tax group, so that all their taxable profits are combined at the level of the parent company. The parent then pays corporate income tax (impôt sur le revenu des collectivités) and municipal business tax (impôt commercial communal) for the whole group. Net wealth tax (impôt sur la fortune), however, is not covered by this group regime: each subsidiary in the group remains liable for its own net wealth tax.
The claimant, a Luxembourg limited partnership by shares (société en commandite par actions), was a member of a tax group led by a public limited company (société anonyme) as the parent company.
The tax consolidation agreement
Since the law does not set out how the tax burden should be shared among group members, the claimant and the other subsidiaries entered into a private tax-sharing agreement (the “Agreement”) with the parent company. Under the Agreement:
- each subsidiary had to work out how much tax it would have paid if it had been taxed on its own, and record that amount as a debt owed to the parent company;
- if a subsidiary made a tax loss, no debt was recorded, but that loss was carried forward and taken into account when calculating future debts once the subsidiary returned to profit.
For the 2016 and 2017 tax years, the claimant recorded these debts and deducted them from its business assets in its net wealth tax returns as at 1 January 2017 and 1 January 2018.
The DTA’s position
In March 2022, the tax office (bureau d’imposition) refused the deduction, on the basis that the debts were really just the parent company's own corporate and municipal tax liabilities in disguise. The director of the DTA upheld that view on 23 February 2023.
The DTA put forward two arguments. First, under Paragraph 53a(1) of the valuation regulations (Bewertungsdurchführungsverordnung, the "BewDV"), only a taxpayer (Steuerpflichtiger) actually subject to a given tax can deduct the related debt. Since the claimant, as a group subsidiary, was no longer liable for corporate or municipal tax, it could not deduct these debts. Second, applying the substance-over-form principle (wirtschaftliche Betrachtungsweise) under the tax adaptation law (Steueranpassungsgesetz, the "StAnpG”), the DTA argued that the Agreement was simply a way of dressing up the parent's tax debts as intragroup debts to reduce the claimant’s taxable net wealth.
The Tribunal’s analysis
The Tribunal ruled in favour of the claimant and overturned the DTA's decision, applying the substance-over-form principle.
The Tribunal accepted that the debts arose from a private contract rather than from the law. However, it drew a clear distinction between the parent's own tax debt, calculated on the group's combined profit, and the financial risk that the Agreement was designed to cover. Under the group tax regime, the parent must pay tax on profits it did not earn itself, yet no legal mechanism requires the subsidiaries to provide it with the funds it needs. The Agreement addressed exactly that cash-flow and default risk, rather than the underlying tax debt itself.
Three factors led the Tribunal to find that the debts under the Agreement could not be treated as the parent's tax debts:
- the total debts recorded by the subsidiaries did not match the parent's actual tax bill, because the Agreement calculated each subsidiary's share as if it were taxed alone, without applying the specific adjustments that apply under the group tax regime;
- the fact that profitable subsidiaries recorded a debt while loss-making ones did not was consistent with the Agreement's purpose of covering financial risk and did not show that the arrangement was artificial;
- the DTA’s reliance on the legal provision under which group members are jointly liable for the group's tax debts, was rejected. That rule exists solely to protect the tax authority from a default of the group head and does not address the financial risk that the parent bears towards its other creditors.
As for the DTA's argument that the arrangement amounted to an abuse of law, the Tribunal rejected it as well. The DTA had not even cited the relevant provisions and had not shown how its conditions were met, while the claimant had put forward sound non-tax reasons for entering into the Agreement.
The Tribunal concluded that the debts under the Agreement were neither the parent's tax debts nor notional tax debts of the claimant. Paragraph 53a(1) BewDV did not prevent their deduction and the other conditions for deductibility under Paragraph 62(1) of the valuation law (Bewertungsgesetz) were not in dispute.
Consequences
This judgment confirms that, where the law provides no mechanism for sharing the tax burden within a group, private tax-sharing agreements are a valid way of managing the financial risks that arise from group taxation and that debts created by such agreements remain contractual debts for net wealth tax purposes. Group subsidiaries with similar agreements may be able to deduct these debts from their business assets, provided the debts are real and legally enforceable. Groups that have not yet set out the sharing of tax-related financial risks in a written agreement may wish to consider doing so, making sure there are genuine non-tax reasons behind it.
This is a first-instance decision and the DTA may appeal to the Higher Administrative Court (Cour administrative). Practitioners and taxpayers should follow any further proceedings closely.
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