Luxembourg: Undisclosed guarantee may reopen assessments, but reallocation must reflect actual functions and risks (Administrative Tribunal decision)
Guarantees are relevant to proper allocation of income and failure to disclose may extend statute of limitations.
The Administrative Tribunal on March 18, 2026, held that the Luxembourg tax authorities were entitled to extend the statute of limitations for assessment when the taxpayer failed to disclose a guarantee that was relevant to the advance tax agreements regarding certain intra-group financing activities between the taxpayer and the tax authorities. However, the amount of interest income to be reallocated on the basis of the guarantee must reflect an arm’s length determination of the actual functions and risks assumed under the guarantee.
Summary
A Belgian company that was a subsidiary of a Luxembourg parent company established a Luxembourg branch to carry out intra-group financing activities. The branch was recognized as a Luxembourg permanent establishment (PE) under the Belgium-Luxembourg income tax treaty and obtained advance tax agreements from the Luxembourg tax authorities that it was generally not subject to tax in Luxembourg on financing income earned with respect to the intra-group financing activities (via a notional interest deduction) because the Belgian company had assumed the main credit risk of the financing activities.
Following a spontaneous exchange of information from Belgian tax authorities, the Luxembourg tax authorities discovered that a counter-guarantee arrangement existed—which had not been disclosed by the branch in connection with its advance tax agreements—under which a Luxembourg company that was a subsidiary of the Luxembourg parent company had assumed the credit risk and possessed the financial capacity to bear it. The Luxembourg tax authorities thus reallocated interest income from the branch to the Luxembourg company for prior tax years subject to the advance tax agreements, even though the statute of limitations for reassessment was closed for those years.
The Administrative Tribunal held that the undisclosed counter-guarantee qualified as a new fact, justifying the extended statute of limitations. However, the tribunal rejected the tax administration's broader position that the full amount of notional interest must 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