Luxembourg: Administrative Tribunal decision on intra-group financing and guarantee arrangements

The Administrative Tribunal on March 18, 2026, issued a judgment addressing intra-group financing activities and guarantee arrangements.

The judgment concerned a Luxembourg company and the tax treatment of intra-group financing income linked to the Luxembourg branch of a Belgian company. Both companies were related parties held by the same Luxembourg parent company. The Belgian company in 2007 established the branch to carry out intra-group financing activities, which was recognized as a Luxembourg permanent establishment under the Belgium-Luxembourg income tax treaty to address double taxation. The branch obtained advance tax agreements from the Luxembourg tax authorities on May 30, 2007, and January 14, 2014. The latter agreement applied as from the 2012 tax year and relied on a March 7, 2012, agreement presenting the Belgian company as assuming the main credit risk, allowing a notional interest deduction.

Background

A March 8, 2012, counter-guarantee arrangement existed under which the Luxembourg company assumed the credit risk. This arrangement was not disclosed to the Luxembourg tax authorities when the second advance tax agreement was requested. Following a spontaneous exchange of information from Belgian authorities on December 17, 2019, the Luxembourg tax authorities issued an audit report on June 14, 2022. The authorities concluded that the Luxembourg company assumed the credit risk and possessed the financial capacity to bear it, and therefore reallocated interest income from the branch to the Luxembourg company for the tax years 2012 to 2017. The Director of the direct tax administration rejected the Luxembourg company's complaint on February 16, 2023, treating the undisclosed guarantee as a new fact justifying a 10-year statute of limitations reassessment.

Tribunal decision

The Administrative Tribunal held that the undisclosed counter-guarantee qualified as a new fact, justifying the extended statute of limitations for the tax years 2012 to 2015. However, the Tribunal rejected the tax administration's broader position that the full amount of notional interest should be reallocated to the Luxembourg company. The Tribunal held that the mere assumption of credit risk was not sufficient to treat the Luxembourg company as the entity performing the full financing activity. The adjustments were justified only to the extent they remunerated the guarantor's functions and credit risk assumed by the Luxembourg company on an arm's length basis.

Read a May 2026 report prepared by the KPMG member firm in Luxembourg