Reclassification of interest-free loans: Key lessons from recent Luxembourg Case Law
In the dynamic landscape of global finance, the availability and diversity of financial instruments are essential to the competitiveness of investment funds. These financial instruments play a central role in the Luxembourg fund industry. Among these instruments, interest-free loans (“IFLs”) have emerged as an impactful tool due to their flexibility, particularly within the Luxembourg fund industry where IFLs are a common feature of various Luxembourg structures.
This article, put together by our Tax Partner, Samantha Hauw, and published by Legal 500, focuses exclusively on the IFL classification, as a debt or as an equity instrument, which has significant implications for Luxembourg tax law and corporate financing practices. Recent developments, such as the Luxembourg Administrative Court’s significant affirmation that IFLs may be reclassified as hidden capital contributions depending on their economic substance, underscore the importance of careful structuring and documentation. This decision follows a series of shifts in case law that have created some uncertainty around the tax treatment of IFLs in Luxembourg.
The question of the qualification of these instruments is crucial as it not only affects the tax treatment but also the cash repatriation strategy in the investment structure as a whole.
Full article below!