Agefi Luxembourg - janvier 2026

AGEFI Luxembourg 10 Janvier 2026 Économie / Banques P rivate debt has become a significant alternative financing source, parti- cularly inEurope andLuxembourg. While offering flexibility, these struc- tures introduce complex transfer pricing challenges due tobespoke terms, contin- gent features, and limitedmarket comparables. This article exa- mines key issues in applying the arm’s lengthprinciple in relation to intra-group finan- cing in the context of private debt transactions, outlines practical approaches for compliance, andprovides a case study illustrating a typi- cal benchmarking in a Luxembourg fund structure. It also explores emerging trends, regulatory scrutiny, and the role of technology in sha- ping future best practices. The rapid growth of private debt markets has re- shaped corporate financing strategies. Unlike tradi- tional bank loans, private debt instruments (such as uni-tranche facilities, mezzanine loans, and hybrid instruments) are often negotiated privately and tai- lored to specific borrower needs. Private debt is not merely a niche product; it repre- sents a structural shift in global capital markets. In- stitutional investors, including private equity funds and alternative asset managers, increasingly favor private debt for its yield potential and flexibility. However,thisevolutionintroducescomplexitiesthat demand a multidisciplinary approach including transfer pricing, tax and regulatory aspects. When carrying out private debt transactions, Lux- embourg investment funds generally finance debt acquisitions via Luxembourg holding companies (“SPVs”). The financing provided by the fund to SPVs in the formof debt is considered a transaction between relatedparties and shouldbe carriedout in linewith the arm’s length principle. However, contrary to other industries (such as real estate and private equity), the characteristics of the third-party receivable instrument and the return ex- pectedcomplicatethetransferpricinganalysisonthe related party transaction, particularly under theOr- ganisation forEconomicCo-operationandDevelop- ment(“OECD”)TransferPricingGuidelines(OECD, 2022), which emphasize accurate delineation and risk allocation. RegulatoryContext for Transfer Pricing The OECD’s Chapter X on Financial Transactions providesaframeworkforpricingintra-groupfinanc- ing arrangements. Tax authorities across Europe, in- cluding Luxembourg, have intensified scrutiny of financial transactions following the OECD’s Base ErosionandProfitShifting(“BEPS”)project.Mispric- ing can result in significant tax adjustments, double taxation, and reputational risk for multinational en- terprisesandassetmanagers.Luxembourg,asalead- ing hub for investment funds, faces heightened ex- pectationsforrobusttransferpricingdocumentation. Authoritiesincreasinglyrequiregranularevidenceof arm’s length pricing, including credit risk analysis, functional profiles, and economic substance assess- ments. Therefore, the Draft Law (Bill No. 8186) and Grand-Ducal Regulation implementing it aims to modernizetransferpricingcomplianceandintroduce documentation obligations in linewithOECDBEPS Action 13 on Transfer Pricing Documentation and Country-by-CountryReporting. While it is not expected that private debt structures will be impacted by the provisions to be introduced by Bill No. 8186, there is significant push in terms of transfer pricing compliance in Luxembourg which canpotentially increase the scrutinyalso instructures where one side of the transaction is not with related parties. This trend is already visible sincemanymar- ket players in the private debt industry are receiving inquiries from the Luxembourg tax authorities in re- lation to their transfer pricingdocumentation. KeyTransfer Pricing Challenges for PrivateDebt In the context of other industries and intra-group funding, it is often possible to rely on third-party transactions that can be used (at least partially) as comparable transactions. This is particularly true in the context of the selection of the intra-group payable instruments (such as interest-bearing loans with or without specific features). However, third-party transactions in the private debtmarkets lack transparency. Increasedcomplex- ity in the instrument features such as payment-in- kind (PIK) interest, equity kickers and contingent clauses affect pricingandriskbut are rarely reflected in standard databases. These features blur the line between debt and equity, increasing questions about characterization and tax implications, thus creating additional complexity froma transfer pric- ing point of view. Unlike syndicated loans, private debt deals are be- spoke,limitingtheavailabilityofreliableComparable UncontrolledPrices (CUPs) to price the relatedparty transactions used to finance them. This scarcity forces practitioners to rely on more complex intra-group payable instruments (such as derivatives) to mirror,asmuchaspossible,theintra- group instruments used to fund the third-party transactions. This in- creases the need to use different methodsthanthetransferpric- ingmethodspresentedinthe OECD Guidelines and en- tails synthetic benchmark- ing or alternative data sources to price them at arm’s length conditions. In addition, the OECD Guidelines require identify- ing which entity controls and assumes credit risk of the trans- actions. Intra-group arrangements often create ambiguity, necessitatingdetailed func- tional analysis especially in the context of private debt funding. Control over risk—notmere contrac- tual assumption—determines entitlement to re- turns, which is the arm’s length remuneration that the SPVs inLuxembourg should earn. Inparticular, the transactions carriedout by the SPVswill not fall into the scope of the Luxembourg Transfer Pricing Circular (Circular L.I.R. No. 56/1 – 56bis/1) since the transaction on the asset side is carried out between unrelated parties. This means that from a transfer pricing standpoint, the requirements might be less stringent. However, the pricing of the arm’s length remuneration is still key, and it can followsimilarmethodologies than the one used for Luxembourg companies falling into the scope of the Circular. In addition, depending on the underlying type of third-party debt, the arm’s length nature of the intra-group payable instrument should bemonitoredtoavoidnon-deductibilityoftheinterest andpossiblewithholding tax. Practical Compliance Strategies When evaluatingwhether intra-group transactions used to finance third-party debt comply with the arm’s length principle, it is crucial to go beyond a purely contractual review and consider the actual behavior of the parties involved, as well as their fi- nancial capacity to provide such funding. These el- ements shouldbe continuouslymonitored toensure that the arrangement reflectswhat independent en- tities would have agreed upon under similar cir- cumstances. Inparticular,whendeterminingthefinancialcapacity of the Luxembourg SPVs (which is linked with the arm’slengthamountofdebtthatSPVscanborrow),a fundamentalcomponentisdetermininganindicative creditratingfortheunderlyinginvestment.However, establishing such a credit rating in the context of pri- vatedebtcanbeparticularlychallenging.Unlikepub- lic debt markets, where credit ratings and market benchmarks are readily available, private debt trans- actionsoftenlacktransparencyandstandardizeddata. As a result, commonly used approaches for intra- group transactions (such as relying on the group’s overall credit ratingorperforminga simple reviewof theborrowers’financialstatements)maynotprovide a reliablemeasure of creditworthiness. To address these limitations, alternative methodolo- gies should be considered. For instance, an analysis basedontheinternalrateofreturn(IRR)oftheunder- lying investment can offer amore accurate reflection ofexpectedperformanceandrisk.Similarly,referenc- ing the credit rating of the broader industry inwhich theborroweroperatescanprovideusefulcontext,par- ticularly in sectors such as real estate debt funding where market dynamics significantly influence risk profiles. These approaches shouldbe complemented by a detailed risk analysis, especially in situations wherethefinancingstructureinvolvesnotonlyintra- group loans but also additional third-party funding. Such complexity increases the need for a robust as- sessmentofpotentialrisksandthecapacityofthepar- ties tomanage them. Finally, all these considerations must be thoroughly documented in comprehensive transfer pricing re- ports. This documentation shouldgo beyond simply presenting the pricing of the intra-group transaction. It should include a functional analysis of the parties involved,aclearexplanationoftheeconomicrationale behindthearrangement,andevidencesupportingthe chosenmethodologies. By doing so, the documenta- tion will not only demonstrate compliance with the arm’slengthprinciplebutalsoanticipateandaddress potential queries fromtax authorities, thereby reduc- ing the risk of disputes. Outlook Tax authorities are increasingly focusing on audits of financial transactions in Luxembourg and other Eu- ropean jurisdictions including private debt funding. AI-driven benchmarking tools and unconventional transfer pricing methods are emerging as a solution to mitigate data limitations and improve predictive accuracy in transfer pricing analyses even though a thoroughtransferpricingfunctionalanalysistogether with business rationale should be included in the transfer pricingdocumentation. Conclusion Private debt structures require rigorous transfer pric- ing analysis, as their bespoke features make arm’s lengthassessmentsmorecomplexandheavilyreliant onrobustdocumentationalignedwithOECDGuide- lines. Increasing scrutiny means that detailed func- tional analyses, clear business rationales, and careful characterization of hybrid or derivative-based intra- group instruments are now essential. The functional profile of Luxembourg SPVs must also be closely monitored and thoroughly documented to address potential queries fromboth local and foreign tax au- thorities. In a fast-evolvingmarket, assumptions that once supported an arm’s length position may no longerhold,makingregularreviewsandstress-testing of transfer pricingpolicies indispensable. Chiara PALMIERI, EY Luxembourg Senior Manager, Transfer Pricing Nicolas GILLET, EY Luxembourg Partner, Transfer Pricing Leader Transfer Pricing Challenges in Private Debt Structures: NavigatingArm’s Length Principles in a Non-Traditional Market By Nessym Jules TIR, Avocat/Partner, Global Compliance & Investigations, Wolff & Partners SCS, Attorneys at law L ast December,AMLApublished the Final Report on theDraft Regulatory Technical Standards (“RTS”) under Article 40(2)AMLDandArticle 12(7) AMLAR. These technical stan- dards are particularly en- lighteningwith respect to the application ofmethodo- logies for obligated entities. A robustmethodology The draft regulatory technical stan- dards on the assessment of the inherent and residual risk profile of obligated entities adopts a methodology that is basedon a risk-based approach under Article 40(2) AMLD. It establishes a basic dataset applicable to all relevant entities, comple- mented by sector-specific data points. (1) The frequencyof auditswill be harmonisedwith the complexity of the entities subject to the audit. This is becausesupervisoryapproachestomoney laundering and terrorist financing (“ ML/CFT ”)riskassessmentatentitylevel are currently fragmented, leading to di- vergentriskassessmentresultsforfinan- cial institutions operating cross-border. This approach thus makes it possible to forge a common reading grid in the evaluation of entities by inspec- tors and supervisors in the im- plementation of supervision strategies. (2) The draft RTS in- troducesacommonsetofdata that will allow for the assess- ment of inherent risks and the quality of controls and can also ensure the comparability of en- tity-level risk assessments. Moreover, this project limits data requests to those strictlynecessaryfortheassessmentofML/CFTrisks attheentitylevelbyincorporatingabasicdatasetthat is applicable to all entities, complemented by sector- specificdata,andwhichpotentiallylimitsthedatare- quiredbymostentitiessignificantlywhencompared withwhat is currently requiredbymost supervisory authorities. (3) Theotherdraftregulatorytechnicalstandardsfocuses on risk assessment for thepurpose of selecting credit institutions,financialinstitutions,andgroupsofcredit institutionsandfinancialinstitutionsfordirectsuper- vision under Article 12(7) of Regulation (EU) 2024/1620. Thedraft RTS sets out the riskassessment methodology that AMLA will apply to determine which eligible entities will be subject to its direct su- pervision. This project introduces alternative quanti- tative thresholds to determine a group-wide risk assessmentmethodologybasedonaweightedaver- age of residual entity-level risk scores. (4) The draft aims to ensure a representation of the risks inherenttothegroups,particularlyonhigh-riskenti- ties and their significant operations. Based on this methodology, AMLA will select the most complex and high-risk entities with the aimof ensuring a co- ordinated and consistent approach to cross-border supervision. The draft RTS clarifies that the thresh- olds are based on the number of customers residing in theMember State concerned or on the total value in euro of the inbound and outbound transactions generated by those customers. The transaction volume threshold allows for cases with few customers but high activity. The draft RTS alsointroduceamethodologyforcalculatingagroup- wideML/CFTriskscore.Thisscoreiscalculatedfrom a weighted average of the residual risk scores at the level of each entity, reflecting the importance of each entity within the group. This approach ensures that entitiespresentingahigherriskofmoneylaundering transfer and terrorist financing (ML/CFT) are taken into account. (5) Anecessary convergence of European supervision Inaddition,inresponsetoaquestionduringtheJoint Committee onEconomic andMonetaryAffairs on 2 December 2025,AMLAPresident Bruna Szego reaf- firmed the need for supervisory convergencewithin the EU in order to fill existing gaps. With regard to high-risk third countries, Ms. Szego assured that AMLA will support the Commission with its own risk analysis and frameworks, allowing for an effi- cientEuropeanlistbyanalysingtherisksendogenous and exogenous to the European Union in the fight againstmoney laundering and terrorism. (6) 1) https://urls.fr/8zdsQI 2) Ibid 3) https://urls.fr/fO4kKj 4) https://urls.fr/egmqIe 5) Ibid 6) https://urls.fr/OeAlx1 AMLA: changes that clarify the outlines of the future regulatory framework