Debt or equity under the LIR: MRPS, hidden capital and interest treated as dividends

The judgments

The question

Whether a financing instrument is debt or equity decides two things for a Luxembourg company. For corporate income tax (impôt sur le revenu des collectivités) and municipal business tax (impôt commercial communal), it decides whether the return paid to the investor is a deductible expense or a non-deductible distribution of profit. For net wealth tax, it decides whether the amount owed to the investor reduces the company’s unit value (valeur unitaire) of business assets. The MRPS taxpayers started from the premise that the Income Tax Law (LIR) contains no specific provisions on the qualification of financial instruments as debt or equity, so that the answer depends on the general principle that substance prevails over form; the courts did not dispute that premise.

The judgments reviewed here approach the question from opposite directions. In the two MRPS cases decided by the Cour administrative (Administrative Court of Appeal) on 31 March 2022, holding companies owned by German real estate funds had issued mandatory redeemable preferred shares to their sole shareholder and asked to have them treated as debt, so that the 6.8% preferred dividend would be deductible interest. In the case decided on 17 April 2025, the tax authority took the initiative: it treated interest-free “shareholder’s loans” to a Luxembourg holding company as a hidden capital contribution, which removed them from the liabilities deductible for wealth tax. In all three cases the taxpayer lost before the Tribunal administratif (Administrative Tribunal) and on appeal. Together the judgments show who may invoke substance over form, who bears the burden of proof, which indicators count, and whether an instrument may be split between debt and equity.

The legal framework

The parliamentary commentary on hidden capital

The courts’ starting point in every case is the commentary on Article 114 of the income tax bill, which became Article 97 LIR (Article 97 is outside our translation). The passage deals with the reverse of the MRPS cases: a loan by a member that is in substance capital. In the Cour administrative’s quotation:

In general, the loan is to be regarded as a participation where the normal method of financing, dictated by serious economic or legal considerations, would have been an increase in capital and where it is clear from the circumstances that the form of the loan can only have been chosen for the purpose of tax avoidance. The absence of the usual legal forms of a loan, namely the fixing of the interest rate and of the terms of repayment, the use of the funds lent for long-term fixed assets, the absence of security and the disproportion between the share capital and the funds lent all provide presumptions of the existence of a participation disguised in the form of a loan.

The commentary adds that where such a loan is “hidden share capital” (capital social occulte), the interest is not deductible for the company, and for the member the loan is an additional participation and the interest a dividend on it. Where the loan immediately follows a repayment of capital, “there can be no doubt about the economic nature of the loan”. The Cour administrative cites this passage as doc. parl. 571/04, p. 295; the Tribunal administratif and the director cite what appears to be the same text as doc. parl. 5714, commentary ad Article 114, p. 180.

To the parliamentary presumptions (applied in Cour administrative, 26 July 2017, no. 38357C, as cited) the courts add indicators developed in case law: voting rights for the lender, participation in profits and risks, a right to any liquidation surplus, a high degree of subordination, a long-term maturity, a conversion option at the company’s unilateral decision, repayment in shares, and a “stapling” clause preventing transfer of the instrument separately from the borrower’s shares (no. 46131C, p. 11).

Substance over form and its statutory anchors

The courts restate a settled principle: facts and legal acts are interpreted according to economic criteria, and the parties’ legal labels are retained by the tax judge only in so far as they correspond to the parties’ real intention (Cour administrative, 26 June 2008, no. 24061C, as cited in no. 46131C, p. 10, and no. 50602C, p. 14). Two provisions of the tax adaptation law of 16 October 1934 (Steueranpassungsgesetz, StAnpG) appear in the cases: § 11 StAnpG on attribution of income and assets, which the director relied on in the 2025 case, and § 6 StAnpG on abuse of law, which the State suggested in the MRPS cases and the director applied to the Malaysian branch in the 2025 case.

Deductible expenses. Under Article 45(1) LIR, “deductible operating expenses are expenses incurred exclusively by reason of the undertaking”. The Tribunal administratif read this as requiring a causal link between the expense and the generation of income, and framed the MRPS question as whether the payments were made to generate or maintain the company’s result or to distribute it to the shareholder (Tribunal administratif, 10 May 2021, no. 43640, p. 21).

The link to the commercial balance sheet. Article 40(1) LIR provides that, where the tax valuation rules do not require a specific amount, the values in the tax balance sheet must be those of the commercial balance sheet or come as close to them as possible. The State relied on it in the MRPS cases; the taxpayer relied on it in the 2025 case. The Cour administrative settled its scope in 2025 (below).

Fixed assets. Article 21(2) LIR defines fixed assets as “assets intended to serve the undertaking on a permanent basis”. The Court used that definition to interpret the parliamentary reference to “long-term fixed assets” (no. 50602C, p. 16).

Distributions. The judgments do not cite Article 164 LIR. In our current text, Article 164(2) treats distributions of whatever nature to holders of shares or other securities as distributions, and Article 164(3) adds hidden profit distributions to taxable income; see our review of hidden profit distributions. In the cases reviewed here, the consequence of an equity qualification follows from Article 45 and the parliamentary commentary: the payment is a dividend, not a deductible expense.

Company law: non-voting and redeemable shares

The MRPS were issued under former Articles 44 to 47 (non-voting shares) and former Article 49-8 (redeemable shares) of the Law of 10 August 1915 on commercial companies, which the Cour administrative identified as now Articles 430-9 to 430-11 and 430-22 (no. 46131C, p. 9). Two features of the former text mattered to the Court. Former Article 44(1) allowed non-voting shares only if they conferred “in the event of a distribution of profits, the right to a preferred and recoverable dividend corresponding to a percentage of their nominal value or accounting par value to be fixed by the articles”, and “a preferred right to repayment of the contribution” (p. 14 and p. 15). Former Article 46(2), as the State described it and as (CD)’s articles reproduced it, gave holders of such shares the same voting rights as ordinary shareholders where the preferred dividend had not been paid for two successive financial years (pp. 7 and 13–14).

Our current text is different. Article 430-9(2) now only requires that the right to a dividend, the right to repayment of the contribution and, where applicable, the right to a liquidation surplus be “laid down in the articles of association”, and Article 430-10(1) grants non-voting shares a vote on resolutions modifying their rights, on a reduction of capital and on early dissolution. Neither contains the fixed-percentage dividend requirement or the two-year rule relied on in 2022. Article 430-22 permits redeemable shares provided that redemption is authorised by the articles, is funded from distributable sums or a new issue, and complies with the other listed conditions.

The MRPS structures

The two MRPS appeals concern sister structures, argued by the same counsel and decided by the same three judges on the same day.

Company (CD) (no. 46131C). Company (CD) was one of the holding companies through which the German investment fund (NO) was present in Luxembourg; its sole shareholder was a German fund represented by a German limited liability company (pp. 6 and 9). On 30 July 2015 an extraordinary general meeting increased (CD)’s capital, paid up the same day from account 115 (“contribution to equity not remunerated by securities”), converted (CD) from a société à responsabilité limitée into a société anonyme, and reclassified its 1,810 shares into 310 ordinary shares, 1,350 alphabet shares in nine classes A to I, and 150 MRPS, each with a nominal value of €100 (Tribunal administratif, no. 43640, p. 20). Part of the share premium was reallocated to an “MRPS premium account” (no. 46131C, p. 9). In 2015 (CD) also set up five French sociétés civiles immobilières and, on 18 December 2015, a French SPPICAV (a variable-capital real estate investment company in the form of a société par actions simplifiée), to which it contributed four of the SCIs; it kept the fifth, (SCI), and a receivable on it (p. 4). (CD) was absorbed by company (BA) on 29 December 2016, which conducted the proceedings (p. 3).

Company (AB) (no. 46132C). Company (AB), of Mertert, was held by the German fund (EF), represented by a German company. On 29 April 2015 its capital was increased from £10,500 by the issue of 605 new shares, paid up from account 115; it became a société anonyme; and its 710 shares of £100 each were reclassified into 310 ordinary shares, 360 alphabet shares and 40 MRPS (Tribunal administratif, 10 May 2021, no. 43559, p. 13; no. 46132C, p. 8).

The terms of the MRPS. In both companies the articles gave each MRPS a fixed cumulative preferred dividend of 6.8% a year, accruing daily on the nominal value and the attached share premium or capital contribution, payable out of the annual net profit after the legal reserve (Article 25). The company could redeem the MRPS until, and had to redeem them at the latest on, the tenth anniversary of issue, at nominal value plus attached premium plus accrued unpaid dividend; if funds were insufficient at maturity, redemption still took place but payment was deferred, with 3% annual interest on the unpaid part, and no distribution could be made on the ordinary shares until full payment (Article 10). On liquidation, after all debts, MRPS holders had a preferred right to repayment of their contribution and no other right to the proceeds (Article 26) (no. 46131C, pp. 14–16; no. 43559, pp. 16–18). The alphabet shares also carried fixed preferred dividends; the ordinary shares of (CD) carried a fixed dividend equal to 10% of their nominal value, those of (AB) one equal to 0.65% of annual net profits (no. 46131C, p. 14; no. 46132C, p. 14).

Accounting and returns. Both companies showed the MRPS in equity in their commercial accounts. Only in the tax balance sheets attached to the returns were the MRPS and the premium shown as debt (“Other debts”, later “Non subordinated debts” or “Creditors”), with a note that the MRPS and the premium were assumed to qualify as debt for Luxembourg income tax and net wealth tax purposes; the preferred dividend was deducted as accrued interest (no. 46131C, pp. 9–10; no. 46132C, p. 9). In (CD)’s corrected return the “MRPS fixed return 2015” was computed on 154 days (no. 43640, p. 11).

The assessments. By letters under § 205(3) of the Abgabenordnung (AO) of 16 May 2018 (CD) and 22 June 2018 (AB), the tax office Luxembourg 6 announced that “the instrument qualified as MRPS is to be regarded as capital”, the deducted interest as dividends, and the MRPS as not deductible from the unit value. The assessments followed on 4 July 2018 and 1 August 2018. The taxpayers filed claims with the director of the Administration des contributions directes (ACD) on 3 October and 26 October 2018 and, the director not having decided, appealed to the Tribunal administratif on 9 October and 16 September 2019 (no. 46131C, pp. 2–3; no. 46132C, pp. 2–3).

First instance: Tribunal administratif, 10 May 2021

The Tribunal administratif decided both cases on 10 May 2021 in substantially identical reasoning (no. 43640 for (CD), no. 43559 for (AB)).

Admissibility. The appeals against the wealth tax assessments were inadmissible. Under § 232(2) AO, an assessment based on figures fixed in a separate determination cannot be attacked on the ground that those figures are wrong; the challenge must be brought against the unit value determination, whose amendment then corrects the wealth tax assessment automatically under § 218(4) AO (no. 43559, pp. 3–5). The appeals against the corporate tax, municipal business tax and unit value assessments were admissible.

The method. The Tribunal framed the question as whether the funds were provided with the intention of a lender seeking a return and repayment at maturity, or of a shareholder seeking to participate in profits and losses (no. 43559, p. 14). It held the parliamentary commentary transferable to “an apparent contribution that the applicant seeks to have requalified as a loan”, and read it as expressing the legislator’s intention not to follow the Bundesfinanzhof’s case law of the time, which emphasised the shareholder’s freedom to choose between equity and loans and the civil-law form, but to maintain an economic analysis that could lead to requalification, “such requalification being capable of operating in favour of or against the taxpayer” (p. 15). Among the rights attached to shares, it was essentially the financial rights that distinguished debt from equity: the hallmark of a share is the variability, indeed the uncertainty, of payments (p. 16).

The features. The non-payment of the preferred dividend in 2015 and 2016, which was not disputed, meant that de jure the MRPS holder had the same voting rights as other shareholders; and non-voting shares are expressly provided for by company law, so they are not ipso facto debt (p. 16). The fixed dividend was not peculiar to the MRPS, since the alphabet shares, more than half of the subscribed capital, also had fixed preferred dividends, and it was payable only out of net profit after creditors had been paid (p. 17). The liquidation preference was likewise subordinated to all debts (p. 17). The fixed ten-year maturity and the redemption terms gave the MRPS “certain characteristics of a debt instrument” and largely reduced the uncertainty attached to them, but that alone did not justify requalification (p. 18).

The circumstances. The decisive elements were the circumstances of issue: the MRPS were issued in a capital increase under the articles, with no loan agreement, no repayment terms and no security; it was not shown that 6.8% was a market rate, the fact that the tax office had not asked for a transfer pricing study being irrelevant because the burden lay on the applicant; and the holder was the sole shareholder of all classes (p. 19). By the applicant’s own account, loan financing was not possible under the German prudential rules binding its shareholder, which is why it used a capital increase, and that was reflected in its commercial balance sheet (p. 19). Faced with an apparent situation that was economically coherent, the applicant could not invoke requalification under the wirtschaftliche Betrachtungsweise when it rested on no consideration other than tax:

It is certainly true that the taxpayer is entitled to choose the least taxed route, subject to a possible finding of abuse of law. In the present case, however, the taxpayer chose a particular form which, as held above, is economically consistent, and it cannot be allowed to go back on that choice on the ground of a requalification as a loan which it admits it did not wish to choose in order to comply with the German prudential rules binding its shareholder.

Market practice before the laws transposing Directives (EU) 2016/1164 and 2017/952 did not bind the administration or the Tribunal, and the applicant had no advance tax decision (p. 20). The MRPS were capital and could not be deducted from the unit value. In no. 43640 the Tribunal also refused the wealth tax exemption for the SPPICAV under § 60 of the Bewertungsgesetz (BewG), because French law (Article 208, 3° nonies of the Code général des impôts) exempts SPPICAVs and the applicant did not show that the SPPICAV did not benefit from that exemption (pp. 29–31), and rejected the claim to disregard the receivable on (SCI) (pp. 31–34). Both appeals were dismissed, the requests for a procedural indemnity of €1,500 rejected and the applicants ordered to pay the costs.

Cour administrative, 31 March 2022, no. 46131C

The grounds of appeal

(BA), acting for (CD), appealed on 16 June 2021. The Court held that the appeal did not extend to the inadmissibility of the wealth tax appeal or to the subsidiary claim for annulment, for which no ground was put forward (p. 3). It examined three points: the MRPS, the SPPICAV and the (SCI) receivable.

On the MRPS, the appellant argued that the parliamentary criteria, applied a contrario, showed debt: fixed maturity, early redemption facilitating disposal, extremely limited voting rights, a fixed return, a fixed redemption price and only a preferred right on liquidation. The identity of the holder was not among the criteria; the fact that the instrument was set out in the articles was irrelevant because the instrumentum does not affect the negotium (pp. 4–6). It relied on a judgment of the Tribunal administratif of 28 January 2020, no. 41800, which, on its account, had accepted MRPS issued to a sole shareholder as debt where the taxpayer held an advance tax decision and had rejected the State’s abuse argument, and argued that equal treatment under Article 101 of the Constitution and § 29(2) AO required the same treatment (p. 6). The MRPS were motivated by prudential, not tax, considerations: the German fund was structured under Article 284 of the Kapitalanlagegesetzbuch, and the Bundesanstalt für Finanzdienstleistungsaufsicht had refused to authorise loans to holding companies in chains of companies; the MRPS were therefore “legally capital while remaining economically and fiscally debt in Luxembourg” (p. 6). Finally, as (CD) was in a back-to-back position, there was no Luxembourg taxation and so no abuse (p. 6).

The State replied that the only debt-like feature was the mandatory redemption date; that (CD) had increased its capital on 30 July 2015 and on the same day turned much of it “suddenly” into loans bearing 6.8% (p. 7); that the holder had voting rights in at least eight situations and, the dividends being unpaid, full voting rights under former Article 46(2) (p. 7); that the sole shareholder took the profits anyway; that a transfer pricing study would have been appropriate; that the absence of a stapling clause did not matter because no transfer to a third party was intended; and that one should ask whether the holder carried the MRPS as a participation or a receivable (p. 7). It added that Germany evidently did not accept the MRPS as debt and that (CD) had chosen Luxembourg to deduct the dividends and pay them without withholding tax on investment income (see Article 146(1) LIR), which could also be abuse of law, in a context of EU efforts against hybrid instruments (pp. 7–8). It relied on the Tribunal administratif’s judgment of 13 December 2018, no. 40705, which treated “equity-tainted loans” as informal capital, on Article 40, on the absence of security and default interest, and on the equity presentation in the accounts filed on 4 January 2017 (p. 8). Equal treatment could not be invoked to obtain the benefit of an illegality committed in favour of another (citing Evonik Degussa, C-155/14) (pp. 8–9).

Who may invoke substance over form

The Court confirmed that Luxembourg tax law knows a principle of the primacy of substance over form, and defined its contours. Its ratio legis is the search for concordance between the qualification at the level of the holder and at the level of the issuer: the commentary explains that the company-law conception must give way to the economic notion of participation because of the “logical necessity of making the qualification of the income from the security in the hands of the holder match the nature of the corresponding expense in the company” (p. 10, quoting doc. parl. 571/04, p. 294). It adopted the Tribunal’s reading of the hidden capital passage and its two limbs: economic equivalence to a participation, and a context showing clearly that the loan form can only have been chosen for tax reasons (p. 11).

The Court then identified two fundamental differences between the parliamentary scenario and the case before it:

First, those parliamentary materials concern the requalification of a financial instrument on the initiative of the tax administration, the taxpayer having deliberately concealed the economic reality under a legal form that did not correspond to it, for the purpose of tax avoidance. There is therefore no question of a right of the taxpayer to a requalification on the basis of an economic assessment. … In other words, the legal form chosen reflects a priori, in an appropriate manner, the economic reality as it appears from the elements submitted to the Administration des contributions directes.

There was no “flagrant inadequacy” between the form (a capital increase followed by a reclassification of shares) and the economic reality (funds made available by a sole shareholder to its subsidiary), since the ACD had not requalified the instrument of its own motion and contested that a requalification was appropriate (p. 12). It was therefore for the appellant to rebut that appearance by showing that the author of the operation intended a particular economic operation, carried it out, and that the legal qualification did not reflect its will. Given the ratio legis, the appellant could also justify the principle by showing that requalification would make the qualification of the MRPS and their income coherent at the level of (CD) and at the level of its shareholder (p. 12). The second difference was that the commentary concerns a loan requalified as a participation, the reverse of the case (p. 12).

The economic analysis of the MRPS

The holder’s books and the German rules. The State’s question whether the holder carried the MRPS as a participation or a receivable was “very pertinent”, and the appellant gave no explicit answer (p. 12). The German prudential argument turned against the appellant:

If the appellant relies on those same German prudential obligations to infer that there were “serious legal reasons for arguing that the granting of a loan was the normal method of financing in this case”, it is in reality putting forward that the sole shareholder of company (CD) was compelled to disguise a loan in the form of shares in order to circumvent a legal obligation.

Through its claim, the appellant sought to benefit in Luxembourg from the favourable tax treatment of a financing operation that its shareholder was prevented from carrying out in compliance with its prudential obligations (p. 13).

The accounts. The appellant had itself “orchestrated” a divergence between form and substance. Luxembourg accounting law for 2015 already allowed substance over form: under Article 29(3) of the Law of 19 December 2002, then in force, the presentation of items “may refer to the substance of the operation or contract recorded”. Noting the Commission des normes comptables’ Q&A CNC 20/021 of September 2020 and the CJEU’s judgment in Wagram Invest (C-640/18), the Court held that an appellant claiming that the legal form did not give a true and fair view should, to be coherent, have applied substance over form in its accounts as well as for tax (p. 13). Our current text of Article 29(3) is in the wording the Court quoted for 2016 in the companion case.

Voting rights. The Court adopted the Tribunal’s analysis: the preferred dividend not having been paid in 2015 and 2016, the holder had de jure the same voting rights as other shareholders, used or not; non-voting shares are provided for by law; and the commentary states that securities conferring only a share in profits, excluding liquidation proceeds, are still participations economically, “the possible absence of voting rights changes nothing” (pp. 13–14, quoting doc. parl. 571/04, p. 294).

The fixed return. The Court added two remarks to the Tribunal’s analysis. Even the ordinary shares carried a fixed dividend of 10% of nominal value; and former Article 44(1) itself required the preferred dividend of non-voting shares to be expressed as a fixed percentage of nominal value, so that feature could not show an intention to make a loan (p. 14). Since the dividend was payable only out of distributable net profit after creditors:

That income is therefore fixed only in that it is expressed as a set percentage, but it remains uncertain in its nature and thus resembles the remuneration of a member.

Liquidation and redemption. The preferred right on liquidation was subordinated to all debts, and former Article 44(1), point 2, itself provided for a preferred right to repayment, leaving any share in the liquidation surplus optional; so the absence of such a share was no departure from the regime of a participation (p. 15). The fixed maturity and redemption terms made the MRPS resemble debt but did not suffice (pp. 15–16). The Tribunal’s phrase “the forms employed” might confuse, but it had looked for substance using the very methodology the appellant advocated (p. 16).

Loan formalities, pricing and the sole shareholder. The MRPS were issued in a capital increase without a loan agreement, repayment terms or security (p. 16). It was not shown that 6.8% was a market rate; the burden lay on the appellant, which also had to show “how the remuneration granted to the holder of the MRPS reflected the risk profile of a lender rather than of an investor” (p. 16). That the lender is also a shareholder does not exclude a loan, but here one person held all classes of shares, so the subtleties of the articles had no practical effect (pp. 16–17). The appellant had explained that the funds were to be lent to subsidiaries to buy real estate, and the use of funds for long-term fixed assets is itself a parliamentary presumption of a participation (p. 17). The apparent situation, a capital contribution conforming to the German rules, was economically coherent, and the requalification sought rested on no consideration other than tax: deducting the MRPS and the dividends for corporate tax, municipal business tax and wealth tax (p. 17).

Market practice, a ruling granted to another taxpayer and equal treatment

Market practice binds neither the administration nor the court. The appellant had no advance decision binding the administration, unlike the taxpayer in the judgment of 28 January 2020, which the Court described as not appealed; nor did it show that it was in the same situation or that the instruments were identical or sufficiently similar, “a mere identity of name being insufficient” (p. 17). Equal treatment cannot lead to an interpretation contrary to the law, and past treatment of others confers no right where the practice is unlawful (Cour administrative, 8 October 2019, no. 42552C, and 24 January 2017, no. 38145C, as cited) (p. 17). The tax office had rightly refused both the deduction of the MRPS from the unit value at 1 January 2016 and the deduction of the payments for 2015 (pp. 17–18).

The other heads: SPPICAV and SCI receivable

SPPICAV. § 60 BewG exempts a participation of at least 10% or with an acquisition price of at least €1,200,000 in, among others, an entity covered by Article 2 of the Parent-Subsidiary Directive (read as Directive 2011/96/EU). The SPPICAV had a covered form, but under Article 2(a)(iii) the subsidiary must be subject to the tax without being exempt. A subjective exemption, attaching to the entity, excludes it. Article 208, 3° nonies CGI expressly exempts SPPICAVs, and Article 208 A concerns only fixed-capital investment companies. Applying Wereldhave Belgium (C-448/15), paras 31 to 33 and 41, a fortiori an entity exempted by law is not covered; the Tribunal’s 2012 judgment on a Belgian SICAV (no. 27587) was distinguishable, and no French assessment had been produced (pp. 18–23). The point on Article 2(a)(ii) had not been argued and was left open (p. 21).

The (SCI) receivable. The parties agreed that (SCI) was transparent. Transactions between a member and its transparent company are disregarded; a loan to it is eliminated outside the accounts and treated as an additional contribution (Cour administrative, 15 March 2007, no. 22233C, as cited), and interest charged to it is a private withdrawal (p. 25). The receivable as such was not part of (CD)’s business assets, but its counterpart in (SCI)’s assets had to be allocated to (CD) (99.99%) unless shown to be exempt. The Court noted that all parties had overlooked the 99.99% holding, so that (CD) should have shown a receivable on the other member for 0.01%, but since the Tribunal had rejected the claim for want of proof, and no tax balance sheet or (SCI) accounts were produced on appeal either, this was no reason to reform the judgment (pp. 24–26).

Outcome

The appeal was dismissed in full and the judgment of 10 May 2021 confirmed, including the refusal of the €1,500 indemnity and the order for first-instance costs. The request for a procedural indemnity of €3,500 on appeal was rejected, and the appellant was ordered to pay the costs of the appeal (pp. 26–27).

The companion appeal: no. 46132C

The judgment in (AB)’s appeal, delivered the same day by the same three judges, repeats the MRPS reasoning almost word for word for the 2015 and 2016 assessments and the unit values at 1 January 2016 and 1 January 2017. The differences are factual. The MRPS were denominated in sterling; the capital increase of 29 April 2015 was entirely allocated to subscribed capital (p. 9); and the 2015 tax return assumed that a sterling capital contribution on account 115 was “made in connection with the MRPS” and qualified as debt together with the MRPS and the dividends (p. 9). The Court quoted Article 29(3) of the Law of 19 December 2002 both as applicable to the 2015 accounts and in its version for 2016 (“may refer to the substance of the transaction or contract concerned”) (pp. 12–13). In its remark on the fixed return, the Court noted that (AB)’s ordinary shares carried a fixed dividend of 0.65% of annual net profits (p. 14). The appeal was dismissed, the judgment of 10 May 2021 confirmed, the €3,500 indemnity refused and the appellant ordered to pay the costs of appeal (p. 17).

Interest-free shareholder loans: Tribunal administratif, 8 May 2024, no. 47267

Facts. Company (A), a Luxembourg société à responsabilité limitée in a group active in oil and gas, was incorporated on 8 October 2014. On 13 October 2014 it concluded two contracts to acquire interests in companies (C) and (CC), whose object was the construction, maintenance and operation of gas pipelines; the acquisitions took effect on 30 April 2015 (Tribunal administratif, 8 May 2024, no. 47267, pp. 1 and 35; Cour administrative, 17 April 2025, no. 50602C, p. 2). The notes to its 2015 accounts recorded group holdings of 15.19% and 15.5% in the two entities and significant influence through board representation (no. 50602C, p. 17). The acquisitions were financed under two “Shareholder’s Loan Agreements” with company (E), another group company, which the Cour described as the appellant’s indirect shareholder (no. 50602C, pp. 2 and 20). On 7 August 2015 (A) applied for an advance decision confirming that participations allocated to a branch in Malaysia would be exempt from Luxembourg wealth tax and their income from corporate tax; on 10 August 2016 the tax office refused, calling it a structure without economic reason constituting abuse of law under § 6 StAnpG (no. 50602C, p. 2).

The assessment and the director’s decision. On 20 August 2020 the tax office informed (A) that the branch was not recognised and that the “shareholder advance” and an “IFRS 9 reserve” were treated as a hidden contribution. The unit value and wealth tax assessments at 1 January 2016 followed on 14 October 2020. On (A)’s claim, the director held on 14 January 2022 (no. C 28891) that the wealth tax assessment could be challenged only through the unit value determination (§ 232(2) AO), that the branch was abusive, and that the loans were a hidden contribution (no. 50602C, pp. 3–10). Citing doctrine, the director defined a hidden contribution (verdeckte Einlage) as a contribution by a shareholder outside any change in subscribed capital, an advantage it would not grant to an unrelated company, and hidden capital (verdecktes Stammkapital) as a loan by a shareholder that an independent creditor acting on market terms would not have granted. He relied on a “Change of Shareholding” clause requiring prepayment if the lender ceased to hold more than 50% of the borrower, which he called stapling; on the absence of any interest; on the use of the funds to finance the participations, with the risk of loss borne entirely by the shareholder; on a debt to equity ratio of 99.998% to 0.002%; and on the fact that the IFRS reserve consisted entirely of part of the loans (no. 50602C, pp. 9–10).

The Tribunal’s analysis. The Tribunal took the loans first (p. 11). The taxpayer argued that requalification required two cumulative conditions, that capital increase was the normal route and that the loan form was clearly chosen for tax avoidance, and that it had no tax motive because it had not deducted the loans from its unit value under § 74 BewG, the loans having financed assets of the Malaysian branch (pp. 11–12). It relied on Article 40 and on Lux GAAP, denied that the change-of-shareholding clause was stapling, pointed to a 1% default rate and to the lender’s right to impose interest under the second loan, invoked a market practice of 85% debt and 15% equity, and tallied the criteria (pp. 12–15).

The Tribunal held:

• No interest. Neither instrument bore interest. That omission alone could not lead to requalification (citing Cour administrative, 23 November 2023, no. 48125C) but was an indicator (p. 17). The lender’s right “at all times” to impose interest on notice did not change this, absent any sign that it intended to use it. The 1% default rate was compensatory or moratory, contingent on a default, and vague (pp. 17–18).
• Disproportion and risk. The amount made available at 31 December 2015, 77% of the facilities (p. 17), represented 99.99% of (A)’s financing; the “other capital reserves” in IFRS equity were themselves part of the disputed loans and could not count as share capital. The risk of loss was therefore borne entirely by the lender (p. 18).
• Security and use of funds. The loans were unsecured, so the lender had made close to half a billion dollars available without any guarantee. The first loan financed the purchase consideration for working interests in the pipeline and adjustments of capital and operating expenditure; the second financed capital, operating and general expenditure for two quarters of 2015. The funds were therefore used essentially for long-term fixed assets (pp. 18–19).
• Indicators of debt. Maturity dates close to ten years were fixed, and there was no stapling clause, contrary to the director: the lender could assign its rights freely, and on a change of shareholding it “may” declare the amounts immediately due, with repayment within ten days, so it could sell its shares in (A) independently of the loans (pp. 19–20).
• Balance. The two debt indicators were insufficient. The exercise is not an arithmetical count of indicators, and the parliamentary materials give no pre-eminence to particular criteria. No third-party creditor on market terms would have lent such amounts to a borrower with practically no equity, without security and without remuneration; the conditions could only be explained by the indirect shareholding link (p. 20).
• The 85:15 argument. Nothing proved such a tolerance; and even the doctrine that treats interest-free loans as capital for the ratio presupposes that the remaining 85% bears interest and is debt, which was not the case (p. 21).

On the branch, the Tribunal found no fixed place of business under Article 5 of the Luxembourg–Malaysia Convention of 21 November 2002, read with the OECD Commentary: no clearly identified office, a service level agreement signed on 7 March 2016 with retroactive effect to 1 January 2015, no evidence of services or payments, and no Malaysian bank account until 2020; at most there were preparatory activities (pp. 28–35). It then held all four conditions of abuse of law under § 6 StAnpG met: use of private-law forms, a wealth tax saving equivalent to the § 60 BewG exemption that (A) admittedly did not qualify for, an inadequate route, and no valid non-tax reasons (pp. 35–41). The appeal was dismissed, the €2,500 indemnity refused and (A) ordered to pay costs (pp. 41–42).

Cour administrative, 17 April 2025, no. 50602C

(A) appealed on 17 June 2024 on three grounds: the qualification of the loans, the branch, and abuse of law (p. 11). On the loans it criticised the Tribunal’s analysis of three criteria (use of funds, disproportion, absence of security) and its global approach (pp. 11–13). It asked, principally, for the director’s decision to be annulled and, in the alternative, for it to be reformed so that only 15% of the drawdowns were requalified (p. 14).

Article 40 and § 11 StAnpG

The Court first clarified the legal basis of requalification, on which the parties disagreed:

Contrary to what the appellant asserts, the theory of the link between the tax balance sheet and the commercial balance sheet anchored in Article 40(1) LIR does not concern the qualification of a financial instrument, but the valuation of assets and liabilities for the purposes of the tax balance sheet.

The Court cited its judgment of 28 May 2020, no. 43749C. § 11 StAnpG does not by itself concern qualification either, but the attribution of income and assets; in creating tax ownership that departs from legal ownership where economic ownership has passed (Cour administrative, 2 July 2020, no. 43931C, as cited), it implements the principle of economic assessment (p. 14). The Court then applied the parliamentary commentary, noting that the member was here an indirect one (p. 15), and added to the list of indicators, citing its 2022 MRPS judgments, the question under which asset heading the holder records the instrument (p. 15). The fact that the lender is a direct or indirect shareholder is part of the circumstances (p. 16).

Long-term assets

The appellant argued that the parliamentary materials do not define “long-term fixed assets”, that the Tribunal had looked through the participations to the pipeline, that the participations were sold after six years under a contract of December 2021 effective February 2022, and that a ten-year loan could not finance a long-term asset (pp. 11–12). The Court rejected each point. By Article 21(2) LIR, fixed assets are those intended to serve the undertaking permanently, so “long-term fixed assets” is a pleonasm, contrasted with realisable and liquid assets held for the short or medium term (p. 16). The participations were classed as “Non current assets” in the 2015 tax balance sheet; their acquisition required government approval, showing a lasting investment; the Tribunal had looked at the participations themselves, the pipeline only explaining the complexity of the acquisition; the companies were not shown to be listed; (A) had no other assets or activity; the notes recorded significant influence; and the close similarity of the companies’ names showed an intention to form a group in a long-term perspective (pp. 16–17). A later sale did not change the classification. As for the maturity, the group had for several years refinanced (A) by successive new loans of at least ten years each, which “de facto amounts to granting a loan for a period longer than 10 years” (p. 17). Circular L.I.R. 164/2 of 28 January 2011 on intra-group financing, relied on by the appellant for a tolerance on equity at risk, was irrelevant to whether an asset is fixed (pp. 17–18).

Disproportion and the 85:15 argument

The appellant had cited no. 48125C for the proposition that disproportion is assessed against debt to equity requirements at the time the funds are made available, but then argued for the acquisition date of 30 April 2015, which the Court found “singular” (p. 18). Since the loans were granted at different times in 2015, the Tribunal’s use of 31 December 2015 was understandable (it captured the second loan), a choice by default (there were no interim accounts) and not prejudicial (the appellant did not show a different ratio at the date of the second drawdown) (p. 18). A market practice of 85% debt and 15% equity is not legally binding. A peer review referred to another entity, and the relevant question was not what other groups did intra-group but what ratio would have applied between third parties. The transfer pricing report on (A) itself was based on an extremely small number of comparables, lacked the promised delineation of the transaction and of the options realistically available, and gave only a vague and unsupported commercial rationale (pp. 18–19). For the arm’s length analysis of financing in other Luxembourg cases, see our review of the arm’s length principle.

All or nothing

The alternative claim to requalify only the excess over an arm’s-length 85% of debt failed on principle:

It is, in fact, a question here of the nature of the disputed loans, which logically cannot be hybrid: either it is entirely a debt, or entirely equity.

The appellant had also misread the Tribunal, which had treated the lender’s exclusive risk of loss as an indicator excluding debt, not supporting it; the point is relevant because a shareholder’s risk is ordinarily higher than a creditor’s (p. 19).

Guarantees, limited recourse and subordination

The appellant said the loans contained no limited recourse clause and that intra-group loans are rarely secured, particularly where the lender already owns all the borrower’s shares. The Court found that a significant limitation of recourse existed in fact: the 2015 management report and note 15 to the accounts recorded a letter in which the lender “affirmed it would not demand any repayment of the amount owing to it except in so far as the funds of the Company permit repayment” and such repayment would not affect the company’s ability to meet its liabilities (p. 19). The Court accepted as plausible that intra-group loans are less often secured, but the lender was an indirect shareholder, so a pledge over the shares in (A) was not impossible, and other forms of security were not explained. The absence of security is not decisive alone but is one criterion among others, and here it brought the lender’s position closer to that of a shareholder (pp. 19–20). The Tribunal had not ignored the five absent equity features (participating interest, liquidation surplus, conversion, repayment in shares, voting or information rights); it had rightly refused an arithmetical approach (p. 20). The lack of subordination to other debts was not decisive and was in any case rendered insignificant by the lender’s undertaking not to demand repayment if that would prevent (A) from meeting other liabilities (p. 20). The four indicators (no interest, manifest disproportion, no security, use for long-term assets), taken together and in the light of the operations as a whole, meant that the loans were in their entirety disguised capital contributions; it was essentially the indirect shareholding link that allowed (A) to obtain such terms (pp. 20–21).

The Malaysian branch and abuse of law

On the branch, the Court applied Article 5(1), (2)(b) and (c) and (4)(e) of the Convention, interpreted in the light of the OECD Commentary because the parliamentary materials on its approval showed that it largely followed the OECD Model (pp. 23–24). It accepted that an office in a three-tower complex might move, but held that it had to be clearly identified at all times, which it was not: the management reports for 2021 and 2022 and for 2023 gave different locations (p. 24). The service level agreement was concluded on 7 March 2016 with retroactive effect to 1 January 2015; the 2016 transfer pricing report recorded that head office services the appellant was supposed to provide to the branch at cost plus 5% were never provided although revenue was booked; payment of fees to the service provider (A1) was not shown; no accounting documents evidenced the services; the bank account was opened only in 2020; the designated branch manager was absent from the board meeting of 8 June 2016; and the Malaysian certificates, dated 31 March 2017 and 31 December 2020, referred only to the years 2017 to 2020 (pp. 24–26). A group employee based elsewhere had negotiated the service level agreement and signed the ruling request on 30 July 2015, and the appellant’s manager was also established outside Malaysia, which “strongly shook” the plausibility of management from Malaysia (p. 26).

Having upheld both the requalification on the basis of economic assessment and the absence of a permanent establishment, the Court held that abuse of law was no longer relevant: Luxembourg kept the taxing right, and the participations could not have been transferred to a non-existent branch. Since the appellant had not discharged its burden of proving the facts it relied on, there was no need to go on to abuse of law (p. 27).

Outcome

The judgment was confirmed, “albeit on partly different grounds” (p. 27). The request for a €5,000 procedural indemnity was rejected, the appellant kept the first-instance costs and was ordered to pay the costs of appeal (pp. 27–28).

How the judgments fit together

One test, two directions. All three appeals apply the same parliamentary commentary and the same list of indicators. When the authority requalifies a loan as capital, as in no. 50602C, the courts look for the presumptions in the commentary and weigh them globally. When the taxpayer seeks to requalify shares as debt, as in the MRPS cases, the Cour administrative adds a threshold: there must be a flagrant mismatch between form and substance, and the taxpayer must show that the form does not reflect its own will or that requalification is needed for coherence between holder and issuer (no. 46131C, p. 12). The Tribunal administratif had described requalification in 2021 as capable of operating “in favour of or against the taxpayer” (no. 43559, p. 15); the Cour administrative did not repeat that phrase and held that the parliamentary materials contemplate no right of the taxpayer to requalification. On these judgments, the taxpayer faces a threshold that the authority does not.

Coherence as the purpose. The Court located the ratio legis of substance over form in matching the treatment at the holder and the issuer (no. 46131C, p. 10). That explains the weight given to the question, unanswered in both MRPS cases, of how the holder booked the MRPS, which the Court in 2025 added to its list of indicators (no. 50602C, p. 15). A taxpayer that cannot show how the other side treats the instrument starts with a gap in its case.

Accounting as evidence, not as rule. In 2022 the equity presentation in the commercial accounts counted against the taxpayers, because accounting law already permitted presentation by substance (no. 46131C, p. 13). In 2025 the Court held that Article 40(1) does not govern qualification at all (no. 50602C, p. 14), so the taxpayer’s argument that the loans would have been debt under Lux GAAP failed. The accounts are relevant as evidence of the parties’ intention and coherence, not as a binding link.

The tax-motive limb. The commentary requires that it be clear from the circumstances that the loan form can only have been chosen for tax avoidance, and the Court restated that limb in both 2022 and 2025 (no. 46131C, p. 11; no. 50602C, p. 15). In the MRPS cases the Court found that the requalification sought rested on no consideration other than tax (no. 46131C, p. 17). In the loans section of no. 50602C, the Court and the Tribunal reached their conclusion from the four indicators and the shareholding link without a separate finding on that limb, although the taxpayer had argued before the Tribunal that it had no tax motive (no. 47267, pp. 11–12). The Tribunal’s abuse analysis did find a purely tax purpose for the branch (pp. 40–41), but the Court did not need to rule on it. How far the second limb must be separately established where the authority requalifies remains open on these judgments.

Regulatory constraints. A regulatory reason for choosing one form, here the German rules on lending by real estate funds, did not help the taxpayer that wanted the opposite form for tax. The Court treated it as an admission that the shareholder had to disguise a loan as shares, and refused to let Luxembourg tax law reward that (no. 46131C, p. 13).

Pricing and arm’s length. In the MRPS cases the taxpayer failed to show that 6.8% was a market rate or reflected a lender’s risk profile (no. 46131C, p. 16). In no. 50602C, an 85:15 market practice, peer data and a thin transfer pricing report did not show the ratio that third parties would have used (pp. 18–19). In both directions, the party claiming debt treatment bears the evidential burden on terms. For the Dutch rules on related-party debt, see our review of the Dutch Article 10a cases.

No splitting. The Court’s statement that an instrument “cannot be hybrid” (no. 50602C, p. 19) rules out a partial requalification limited to the excess over an arm’s-length level of debt. The reasoning concerns the nature of the instrument; the judgments do not consider whether a different result could follow from a rule on the amount of deductible interest.

What it means in practice

• Consistency across all documents. The MRPS taxpayers lost partly because their commercial accounts showed equity and only the tax balance sheet showed debt. Where an instrument is meant to be debt for tax purposes, the articles, the accounts, the tax return and the holder’s own books should tell the same story, and the holder’s classification should be available (no. 46131C, pp. 12–13).
• Shares are presumed to be equity. A taxpayer that issues shares and wants debt treatment must rebut the legal form. Fixed maturity and fixed redemption price are not enough where the dividend depends on distributable profits and the liquidation right ranks after all creditors (no. 46131C, pp. 14–16).
• Pricing evidence. A fixed rate on an instrument held by the sole shareholder needs support showing that it is a market rate for a loan and reflects a lender’s risk; the tax office’s silence does not shift the burden (no. 46131C, p. 16).
• Rulings and practice. Only an advance decision addressed to the taxpayer itself binds the administration on qualification. A favourable judgment for another taxpayer with an instrument of the same name, market practice and past administrative tolerance do not (no. 46131C, p. 17; no. 50602C, p. 18).
• Interest-free and unsecured group loans. No interest, no security, near-total debt financing and use for participations held long term together point to hidden capital, even with a fixed maturity and no stapling clause (no. 50602C, pp. 20–21). Comfort letters in which the lender undertakes not to demand repayment beyond the borrower’s means are treated as limited recourse (p. 19). Repeated refinancing by new ten-year loans may be treated as a longer maturity (p. 17).
• Debt to equity ratios. Evidence should show the ratio at the time each tranche is made available, if necessary with interim accounts, and should address what independent parties would accept, not what peers did intra-group (no. 50602C, p. 18). A transfer pricing report needs adequate comparables and an analysis of the options realistically available (pp. 18–19).
• No partial requalification. On these judgments, an instrument is debt or equity in full (no. 50602C, p. 19).
• Wealth tax and procedure. Requalification affects the unit value as well as profit taxes. Challenges to wealth tax figures must be directed against the unit value determination; an appeal against the wealth tax assessment itself is inadmissible on that ground (§ 232(2) AO; no. 43559, pp. 3–5; director’s decision in no. 50602C, p. 4).
• Branches. Allocating participations to a foreign branch requires a clearly identified fixed place, real management activity there and evidence of services and payments; documents with retroactive effect and the absence of a local bank account weigh heavily (no. 50602C, pp. 24–26). For the related questions under the participation exemption and abuse of law, see our review of Article 166 and abuse of law.

Status

All three appeals were dismissed and the first-instance judgments confirmed; the cases are closed. The MRPS judgments concern the tax years 2015 and 2016 and unit values at 1 January 2016 and 2017; no. 50602C concerns the unit value at 1 January 2016.

The company law applied in 2022 has changed in the respects that mattered. The Court relied on former Article 44(1) of the 1915 Law, which required a fixed-percentage preferred and recoverable dividend and a preferred right to repayment for non-voting shares, and on former Article 46(2) on voting rights after two years of unpaid dividends. Our translation of current Articles 430-9(2) and 430-10(1) contains neither rule: the articles of association must now lay down the dividend and repayment rights, without a prescribed percentage. Whether that weakens the Court’s argument that the fixed percentage was imposed by law, for instruments issued under the current text, is not addressed in the sources.

Our current LIR text also contains provisions not applied in these judgments: an interest limitation rule in Article 168bis(2) and rules on hybrid mismatches in Article 168ter. Before the Tribunal administratif, the MRPS taxpayers argued that their structures predated the laws transposing Directives (EU) 2016/1164 and 2017/952 (no. 43559, p. 11), and in no. 47267 the Tribunal applied § 6 StAnpG “in its version applicable to the dispute”, with a footnote referring to the Law of 21 December 2018 transposing Directive 2016/1164 (p. 36). None of the judgments examines how Articles 168bis and 168ter interact with the hidden capital doctrine.

Provisions discussed

• Income Tax Law: Art. 21, Art. 40, Art. 45
• Company Law: Art. 430-9, Art. 430-10, Art. 430-22
• RCS Law: Art. 29

Related reviews

How to cite

Case law review by BCA EU, for information. Quotations from the judgments are our translations; only the original texts published by the courts are authoritative. Judgments checked on the official sources on 30 October 2026. This page is not legal or tax advice.