Luxembourg TP: Guarantee fees in focus

On 18 March 2026, the Administrative Tribunal (“the Administrative Tribunal” or “the Tribunal”) delivered what appears to be the first Luxembourg transfer pricing case addressing intra-group financing activities and guarantee arrangements. The judgment concerns a Luxembourg company (“LuxCo”), and the tax treatment of intra-group financing income linked to the Luxembourg branch (“the Branch”) of a Belgian company (“BelCo”). LuxCo and BelCo are related parties within the same group, both are held by the same Luxembourg parent company (“CC”).

The case raises interesting and complex questions: how far can the tax authorities go when an undisclosed guarantee changes the risk profile of an intra-group financing structure? Can the assumption of credit risk alone justify reallocating financing income to the guarantor? And where should the line be drawn between a guarantee fee and the attribution of the full financing return to the guarantor?

The dispute came to light after the Luxembourg tax authorities discovered, through information spontaneously exchanged by the Belgian tax authorities in the context of an audit of BelCo, that LuxCo had issued a guarantee under which it assumed the credit risk connected with the Branch’s financing activity. This arrangement had not been disclosed at the time a tax ruling was requested by the Branch and accepted by the Luxembourg tax authorities.

Background and facts

In 2007, BelCo, a Belgian resident company, established the Branch to carry out intra-group financing activities, which was recognized as a Luxembourg permanent establishment under Article 5 of the Belgium–Luxembourg double tax treaty. The Branch obtained two advance tax agreements from the Luxembourg tax authorities, dated 30 May 2007 and 14 January 2014 (the latter following a request of 29 October 2012 and applying as from the 2012 tax year).

The second ruling was based on the premise that the Branch performed the financing activity while bearing only limited credit risk. This position relied on a 7 March 2012 agreement under which BelCo was presented as assuming the main credit risk related to the receivables allocated to the Branch, allowing the Branch to claim a notional interest deduction of 99% of its financing income, with only a small margin remaining taxable at Branch level as remuneration for its functions and limited risk exposure.

The tax treatment approved by the Luxembourg tax authorities was therefore based on the contractual and functional allocation presented to them at the time. The ruling applied only if the facts presented were complete, accurate and consistent with the actual transactions and applicable law.

A central fact in the later dispute was the existence of a second agreement, dated 8 March 2012, which operated as a counter-guarantee arrangement under which LuxCo assumed the credit risk linked to the Branch’s financing activity. The agreement had not been submitted to the Luxembourg tax authorities when the second ruling was requested, although the ruling request was filed later, on 29 October 2012. Importantly, the taxpayer acknowledged that the agreement had been omitted from the ruling request, but the omission was not treated by the Court as intentional.

The existence of this counter-guarantee arrangement came to light following a spontaneous exchange of information from the Belgian tax authorities to the Luxembourg tax authorities on 17 December 2019. The Belgian tax authorities had audited BelCo and concluded that BelCo was not involved in the financing activity in Belgium and could not be taxed there on the notional interest income recognised in relation to the Branch. According to the information exchanged, BelCo had relied on the 8 March 2012 letter in Belgium to show that the credit risk was in fact borne by LuxCo in Luxembourg rather than by BelCo.

Following discussions with LuxCo, the Luxembourg tax authorities issued an audit report on 14 June 2022 covering the financial years 2014 to 2018. The report concluded that:

- the group had implemented a structure resulting in interest income escaping taxation since 2012; and

- the income arising from the intra-group financing activity should be attributed to LuxCo.

This position was based on the view that LuxCo had assumed the relevant credit risk, possessed the financial capacity to bear that risk, and performed (or controlled) the economically significant functions and decision-making associated with the financing activity.

In assessing LuxCo’s capacity to bear risk, the Luxembourg tax administration relied on several elements:

LuxCo acted as the group’s main holding company and had the ability to support the borrowing entities through equity injections via intermediate holdings.
Its equity was more than sufficient to cover the risk exposure linked to the receivables portfolio held by the Branch.
The Branch was acknowledged to perform routine administrative functions, such as loan administration, contract preparation and execution, and the monitoring of payments. In the tax authorities’ view, key functions, risks, and decision-making authority were located at the level of LuxCo.

At the same time, the authorities rejected the argument that LuxCo’s role could be treated as a shareholder activity. They emphasized that, even in the absence of any actual default, an independent party would not assume such credit risk without compensation. They also noted that the Branch’s credit risk had not been transferred to another party within the group and had been supported, without remuneration, since 2012.

On this basis, the Luxembourg tax authorities issued amended corporate income tax and municipal business tax assessments for the years 2012 to 2017¹, reallocating interest income from the Branch to LuxCo.

Further, by decision of 16 February 2023, the Director of the direct tax administration (“the Director”) rejected LuxCo’s complaint, taking the view that the counter-guarantee agreement and the information received from Belgian tax administration constituted new facts justifying a reassessment of the corporate tax returns with a 10-year statute of limitation. The Director further considered that the second ruling applied only to the Branch and not to LuxCo, and that adjusting LuxCo’s taxable income did not breach that ruling.

LuxCo then appealed to the Administrative Tribunal, seeking reversal or annulment of the decision.

The Tribunal’s ruling

On the application of the advance tax agreements, the status of limitation, and presence of new facts

The Administrative Tribunal held that the counter-guarantee arrangement qualified as a new fact, since the 8 March 2012 counter-guarantee had not been disclosed to the Luxembourg tax authorities when the ruling was requested. Although the tax authorities had issued amended assessments for 2012 to 2017, the limitation-period analysis ultimately mattered only for 2012 to 2015, because those were the only years for which LuxCo’s challenge was examined on the merits. For 2016 and 2017, LuxCo was part of a fiscal unity and its own tax liability was set at zero, meaning that any challenge had to be brought at the level of the tax-integrated group rather than by LuxCo directly. The Administrative Tribunal therefore found LuxCo’s challenge inadmissible for those years. For 2012 to 2015, however, the Administrative Tribunal found that the undisclosed counter-guarantee showed that LuxCo had assumed credit risk without reporting corresponding arm’s length remuneration, rendering its tax returns incomplete or incorrect in that respect.

The disputed tax assessments covering the financial years 2012 to 2017 were issued on 10 August 2022, based on § 222 (1) n° 1 and 2 of the general tax law. LuxCo claimed that absent of new facts since the initial taxation of the company for those years, the applicable statute of limitations was 5 years. The Administrative Tribunal, however, noted that the Director’s decision held that the new facts in this case consisted of the information provided spontaneously by the Belgian tax authorities, including the letter of counter-guarantee.

For the Administrative Tribunal, these facts and acts constituted elements that were brought to the attention of the Luxembourg tax authorities through the spontaneous exchange of information received from the Belgian tax authorities on 17 December 2019. It was common ground that this date, which was not disputed by the plaintiff company, was subsequent to the issuance of the initial tax assessments. The Tribunal therefore held that the undisclosed counter-guarantee arrangement could qualify as a new fact capable of justifying the reopening of the assessments.

Therefore, and contrary to what AA maintained, it is the view of the judge that the tax authorities cannot be criticized for having been unaware of these elements before they were communicated to it by the Belgian tax authorities. The presence of new facts justified the extension of the statute of limitation from five-year to the then-year period, so the reassessments for 2012 to 2015 were not outside the limitation period.
On LuxCo’s role and remuneration

The Tribunal did not accept LuxCo’s shareholder activity argument. LuxCo’s role as a group holding company did not justify assuming a significant credit risk free of charge. The Tribunal held that the counter-guarantee should be remunerated on an arm’s length basis, but only for LuxCo’s guarantor function and credit risk assumption.

It follows that the Tribunal rejected the tax administration’s broader position that the full amount of the notional interest deducted at the level of the Branch should be reallocated to LuxCo. In particular, the Tribunal found that the administration had not sufficiently demonstrated that LuxCo had performed all the economically significant functions, exercised the relevant decision-making powers, or assumed all the risks connected with the intra-group financing activity. The mere assumption of credit risk was not sufficient, on its own, to treat LuxCo as the entity actually performing the financing activity.

Accordingly, the Tribunal held that the adjustments were justified only to the extent that they remunerated the guarantor’s functions and credit risk assumed by LuxCo under the guarantee arrangement. The Tribunal therefore partially reversed the Director’s decision and referred the case back to the Director to determine the appropriate arm’s length guarantee fee.

Key Takeaways from this ruling

The judgment is a strong reminder that assuming credit risk in Luxembourg must be paid for. Where a Luxembourg entity effectively takes on credit risk under an intra‑group guarantee or similar support, that risk must be clearly delineated and remunerated at arm’s length, even if no default ever occurs.

The Tribunal concluded that LuxCo both assumed credit risk and possessed the financial capacity to bear that risk. As a result, it held that an independent party in comparable circumstances would require appropriate compensation for undertaking such risk.

Focus on Both Sides of the Transaction

For Luxembourg taxpayers, the decision reinforces the need to properly delineate, price and document intra‑group financial transactions, including loans, guarantees and other forms of financial support. Transfer pricing for financial transactions should be analyzed from both sides:

Is the guarantor appropriately remunerated?
Which entity benefits from the guarantee and should bear the cost, in line with its functional profile and risk assumption?

Risk Assumption vs. Full Financing Activity

The judgment draws a clear distinction between:

Assuming a specific risk (e.g. credit risk) that justifies a guarantee fee, and
Carrying out a full financing activity (functions, control, decision‑making and resources) that could justify allocating full financing income.

For Luxembourg holding and financing structures, this confirms that profit allocation must be proportionate to the actual role. Where only credit risk is assumed, the outcome should usually be a guarantee fee, not a full reallocation of financing returns.

Transparency, Limitation Periods and Cross Border Audits

The case also illustrates that:

Non‑disclosure of material arrangements (such as guarantees) can be treated as a “new fact”, supporting a ten‑year limitation period.
Audit readiness is cross‑border: a Luxembourg audit can follow a foreign audit and information exchange.
Tax rulings are strictly fact‑dependent and their protection may fall away when the factual reality changes or was incomplete.

In light of this milestone decision, we suggest to review your Luxembourg structures to identify and mitigate potential risks. As a first step, we would propose to:

map whether any of your Luxembourg entities act as guarantors (or counter-guarantors) within the group;
verify whether these entities receive an arm’s length guarantee fee; and
where no fee is charged:
- assess the quality of the arguments in favor of not remunerating
- review whether there is robust documentation (e.g. transfer pricing policy, board minutes, transfer pricing assessment or analysis) clearly explaining why no guarantee fee is considered due.

KPMG can assist taxpayers in reviewing and advising on such arrangements in light of this new court case, including from a transfer pricing documentation, disclosure and risk management perspective.

¹ Although the audit report formally covered 2014 to 2018, the authorities considered the arrangement to have been in place since 1 January 2012 due to the retroactive effect of the undisclosed counter-guarantee dated 8 March 2012. While 2018 was covered by the audit, no amended assessment had been issued for that year at the time of LuxCo’s administrative complaint, leading the Director of the tax administration to declare the complaint for 2018 inadmissible.