Agefi Luxembourg - février 2026

Février 2026 37 AGEFI Luxembourg Droit / Emploi O n 18December 2025, the Luxem- bourg administrativeCourt of Appeal ( Cour administrative, 18 décembre 2025, n°52666C ) (the “Adminis- trativeCourt” or the “Court”) had the op- portunity to review the position taken earlier that year by the Luxembourg administrative Tribunal (the “Administrative Tribunal” or “Tribunal”) ( Tribunal admin- istratif, 26 février 2025, n°47358 ) concerning the non- deductibility for Luxem- bourg direct tax purposes of interest expenses in connec- tionwith a loan granted to a taxpayer by an affiliatedun- dertaking. Summary of the case The situation at issue was quite specific and may be summarized as follows. - On 31 July 2014, a loan (“ the Loan ”) was granted to atransparentcompany(i.e.underthelegalformofan SCI, société civile immobilière ) (the “ transparent entity ” or“ theSCI ”)byanaffiliatedundertaking(the“ Initial Lender ”) to enable the former to refund its share- holder current account. Its shareholderswerenatural persons tax resident inLuxembourg. - The amount to be refunded resulted from an ex- change of lands between the transparent entity/SCI and the Luxembourg State. This exchange gave rise to a capital gain on the land given in exchange. Fur- thermore, as the land receivedby the transparent en- tity/SCI had a higher value than the one given in exchange, a cash adjustment was paid by the trans- parent entity/SCI funded by its shareholder current account (refinanced with the Loan as described above). - On 1October 2014, a newentity, the taxpayer in the case at hand (the “ taxpayer ”), was established under theformofanSCS( sociétéencommanditesimple )bytwo shareholders (with one being the SCI). The Loan payable was transferred via contribution in kind as part of a business transfer by the SCI to the taxpayer uponincorporationofthelatter.Shortlyafter,thetax- payer (initially incorporated as an SCS) was trans- formed into anSA( société anonyme ).At the same time theSCIwas liquidated.Anaddendumwas signedso that the Loan could continue to be in force between the Initial Lender and the taxpayer. - InDecember 2014, the remaining shareholder of the taxpayerwas absorbedby aLuxembourg entity. The lattersubsequentlyformedafiscalunity(actingasthe integrating entity)with the taxpayer. In October 2020, the Luxembourg tax authorities (“ LTA ”) challenged the tax-deductible treatment of interest expenses arising fromthe Loan, as reported in the 2017 corporate income tax return of the SA. As the taxpayer was part of a fiscal unity, its share- holder – the integrating entity (the “ Appellant ”) – filed an administrative claim with the Director of the LTA, whichwas rejected. TheAppellant subse- quentlyfiledanappeal before theLuxembourgAd- ministrative Tribunal. Forreadersseekingadditionaldetailsonthefactsand thedecisionofthefirst-instancejudges,seeourarticle on the case (1) . TheTribunal tookanuancedapproach, holdingthat,althoughtheLoanshouldnotberechar- acterized as a hidden capital contribution (“ HCC ”), interest expenses in relation to the Loan should nonetheless be treated as non-deductible for Luxem- bourg tax purposes under the circumstances. Dissat- isfied with this outcome, the Appellant tried its luck by filing a second appeal, before the Administrative Court this time. Decisionof theCourt The Court confirmed the first-instance judgment in favor of the tax administration. Like the Tribunal be- foreit,itsdecisionwastwofold,addressingthefollow- ing questions: 1. Whether the Loan could be requalified into an HCC; 2. If not, whether therewere still grounds to treat the interest expenses accrued on the Loan as non-de- ductible froma tax standpoint. Debt characterization of the Loan In addressing the question of whether the Loan could be recharacterized as an HCC, the Adminis- trativeCourtfullyendorsedtheTribunal’sapproach. RelyingonparliamentarycommentsconcerningAr- ticle 97 of Luxembourg income tax law (2) (“ LITL ”), theCourt confirmed that anHCC treatment applies only to loans granted by a shareholder , typically whena capital increasewouldhavebeen thenormal financing method or where the loan was clearly structured solely for tax purposes. TheCourt noted thatwhile the Initial Lenderwas an affiliatedundertakingandshared the sameultimate beneficiaries, it was not a shareholder of either the taxpayer or theAppellant. Following the Tribunal’s reasoning, the Loan couldnot be reclassified into an HCC. Economic realitiesof related-partyoperations, though potentially suspicious, should not broaden the scope of Article 97 LITL or override established administrative practice. By following the Tribunal’s narrow interpretation, the Court confirmed that the Loan remainedadebt instrument. On that basis, the interest expenses should generally remain de- ductible, except where another legal provision would dictate otherwise. Interest expenses tax treatment The Court also confirmed the Tribunal’s view on this secondaspect.According to theCourt, although the Loan was no longer part of private assets after the taxpayer’s conversion into an SA, the mere in- clusion in the balance sheet should not automati- callymake interest payments deductibleunder Article 45 LITL. In assessing the deductibility, the Adminis- trativeCourtreiteratedthatakeytestisasuf- ficientlycloseandexclusivelinkbetweenthe expense and the taxpayer’s actual business activity. The Court, following the Tribu- nal’s reasoning, lookedat the origins of theLoan(whichwasusedtorepaythe shareholder current account of the SCI resulting from the exchange of lands) and observed it was con- tractedby theSCI to let partners ac- cessunrealizedcapital gains, not to finance core operations. Subse- quently contributing the Loan payabletothetaxpayerdidnotcre- ate a neweconomic link. TheCourt also confirmed the Tribunal’s analysis on the underlying exchange of land with the Luxem- bourgState: theLoanwasnot used toacquire theex- changed properties, which were primarily settled through the reciprocal transfer of land. The cash ad- justment ( soulte ) thatwasmade tobalance thediffer- ence in value between the exchanged plots was of secondary importance, intended only to preserve economic balance and did not transform the ex- change into a sale. In this regard, theCourt highlighted that, for taxpur- poses,Article22LITLprovidesthat“ theexchangeofas- sets is treated as a disposal of the asset given in exchange followed by the acquisitionof the asset received in exchange, each at its estimated market value ” (3) whileArticle 25 (1) LITL allows a cash adjustment to balance exchanges ofunequalvaluetosomeextent (4) ,providedthatsuch paymentremainsincidentalanddoesnotconvertthe exchange into a sale.Applied to the case at hand, the judges observed that the values of the assets ex- changedwere broadly comparable, and the cash ad- justment only equalizedminor differences. Finally, any attempt from theAppellant to frame the Loanasinternalshareholderfinancingreplacedbyex- ternal lending was also rejected, as no prior internal financing by the shareholders had takenplace. Consequently, the Court concluded that theAppel- lant failed to demonstrate the required causal con- nection between the Loan and the company’s activity. In other words, while the Loan was now part of the company’s balance sheet, the interest charges paid on it did not qualify as tax-deductible expenses.Thefirst-instanceconclusioninfavorofthe LTAwas therefore fully confirmed. Key takeaways This decision is notable as it reflects a consistent and nowwell-settled approach by the administrative ju- risdictions towards the disputed tax issues, leaving taxpayerslimitedroomfordebateinfuturechallenges by theLTA.On the recharacterizationof loans intoan HCC,theCourt’srulinglargelyfollowedtheTribunal and did not break new ground. Rather, it reinforced thestrictframeworkthatshouldgovernthedebt-ver- sus-equity analysis. As already discussed in our first article, the classification of a financing transaction must be assessed through a combined reading of the parliamentary comments to Article 97 LITL and es- tablished case law. From a practical standpoint, the Court’s position clarifies two keypoints: - Shareholding link is decisive. The Court, like the Tribunal, adhered to a literal interpretation: a financ- ing operation between affiliated companies without a shareholder relationship does not suffice to trigger equity recharacterization. - Context matters, but within strict limits. Only if a shareholder relationship exists should one examine, ona case-by-case basis,whether thefinancingwould normally have been structured as a capital contribu- tion under sound economic or legal considerations. The Court confirmed that such assessment must re- main grounded in the traditional criteria established by administrative case law – i.e. the economic reality alone cannot broaden the scope ofArticle 97 LITL. On the tax-deductibility of interest, the Court dou- bled down on the Tribunal’s economic approach: simply showing a loan on the company’s balance sheet does not make related interest automatically deductible. The decisive test remains a sufficiently closeandexclusivelinkbetweentheexpenseandthe company’s business activity. A loan originally con- tracted by a transparent entity to let partners access unrealized capital gains cannot later be treated as business financing merely because it was con- tributed to a corporate successor. The decision also underscores that the LTA and ad- ministrative judges focusoncashflowandactual use offunds,notonaccountinglabelsorbalancesheeten- tries.Inthiscontext,apurelytechnicalinclusioninthe accountswill not necessarily satisfyArticle 45 LITL. The economic reasoning of the Court is not always easy tounderstand for the reader, potentiallydue to a lackof detail about certain facts andcircumstances as well as about some of the arguments of the Ap- pellant. It would have been useful to see the Court’s thinking regarding the potential economic link be- tween the piece of land initially owned by the SCI (that would later be exchanged with the Luxem- bourg State) and the internal shareholder financing (that would subsequently be replaced by the Loan). Thispieceofthepuzzle,thatwouldallowustomake full sense of the conclusion that the piece of land re- ceived in exchange and the Loanwere not econom- ically related, ismissing. Inanyevent, thedecisionstands as auseful reminder that, in tax matters, facts and circumstances prevail and that accounting entries alone are not necessarily sufficient to evidence the true economic reality. EmilienLEBAS, Partner,HeadofInternationalTax, Taxcontroversy&disputeresolution leader ValentinePLATEAU,Manager,InternationalTax KPMGLuxembourg 1) E. Lebas and V. Plateau, “ Administrative Tribunal: Judgment on hiddencapitalcontributionrequalificationandinterestexpensesdeducti- bility ”,AGEFILuxembourg,April2025,Page38. 2)Loimodifiéedu4décembre1967concernantl’impôtsurlere- venu. 3)UnofficialEnglishtranslationbytheauthors.Article22(4)LITL: « L’échange de biens est à considérer comme cession à titre onéreux du biendonnéenéchange,suiviedel’acquisitionàtitreonéreuxdubienreçu enéchange.Leprixdecessiondubiendonnéenéchangecorrespondàsa valeurestiméederéalisation.» 4)UnofficialEnglishtranslationbytheauthors.Article25(1)LITL: « Encasd’échangedebiens,leprixd’acquisitiondubienreçuenéchange correspond à la valeur estimée de réalisation du bien donné en échange, diminuéeouaugmentéed’unesoultelorsquelesbienséchangésn’ontpas lamêmevaleur .» Tax controversy series Administrative Court –Appeal decision on hidden capital contribution requalification and interest expenses tax deductibility M e Stéphanie Juan, Associée de l’Etude MOLITOR Avocats à la Cour Jeudi 19 mars de 11h45 à 14h15 Conférence Ecofin Club à l’Hôtel Parc Belair - Goeres Hotels Luxembourg Coliving au Luxembourg – entre opportunités d’investissement et défis juridiques Paf membres : 75€ ttc pp (Apéro networking & lunch 3 services compris). 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