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

On 23 November 2022, the Luxembourg Administrative Court held its decision in a case concerning an interest-free loan which was granted by a Luxembourg company to its wholly-owned Luxembourg subsidiary.

This decision overturns the ruling of the Administrative Tribunal of 23 September 2022 which confirmed the position of the Luxembourg tax authorities that classified the interest-free loan as a hidden capital contribution (rather than a debt instrument).

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 interest-free loans to finance Luxembourg companies, the importance of the Decision cannot be overstated. Indeed, over the last year, some Luxembourg tax advisers became extremely concerned when considering the implementation of IFLs. As such, the Decision of the Court has contributed to much-needed legal certainty.

In this article, Tax Partner, Oliver R. Hoor, and Chief Knowledge Officer, Marie Bentley, analyse the decision of the Administrative Court according to which an interest-free loan qualifies as a debt instrument.