Administrative Court clarifies the tax treatment of an interest-free loan (IFL) and overturns the decision of the Tribunal

On 23 November 2023, the Luxembourg Administrative Court (Cour Administrative, the “Court”, which is the instance of appeal) held its decision (the “Decision”) in a case concerning an interest-free loan (“IFL”) which was granted by a Luxembourg company to its wholly owned Luxembourg subsidiary.

The Decision overturns the decision of the Administrative Tribunal (the “Tribunal”) of 23 September 2022 which confirmed the position of the Luxembourg tax authorities (“LTA”). The LTA classified the IFL as a hidden capital contribution (rather than a debt instrument) which had significant tax consequences in the case at hand.

In our ATOZ Report (released in March 2023) we carefully analysed the classification and tax treatment of the IFL and reached the same conclusions as the Court. Considering the wide-spread use of IFLs to finance Luxembourg companies, the importance of the Decision cannot be overstated. Indeed, over the last year, some Luxembourg tax advisers have been extremely concerned when considering the implementation of IFLs. As such, the Decision is contributing to much needed legal certainty.