Hidden profit distributions under Article 164(3) LIR and the 15% withholding tax: the Luxembourg administrative courts, 2018–2026

The judgments

The question

A Luxembourg company that pays a dividend withholds 15% tax unless an exemption applies. A company that instead pays its shareholder’s rent, lets him drive its cars, lends to his relatives without interest or pays him interest above the market rate makes no dividend in form. The Income Tax Law (LIR) treats such benefits as what they are in substance. Under Article 164(3) LIR, hidden profit distributions (distributions cachées de bénéfices, often abbreviated “DCB” in the administration’s letters) are added back to the company’s taxable income. Under Article 146 LIR, as the director of the Administration des contributions directes (ACD) puts it in his decisions in 40348, 43264, 48701, 49122 and 51646C, open and hidden distributions alike bear the withholding tax on investment income. The result is a double charge: corporate income tax and municipal business tax on the added-back amount, plus 15% withholding.

For owner-managers, family companies, holding structures and their advisers, the practical questions are these. What must the tax office show before it can treat an expense or a financing term as a distribution? When does the burden shift to the company, and what evidence rebuts it? How is the benefit valued, especially for interest? Can the company set the benefit off against advantages its shareholders gave it? And what happens to the manager when the company cannot pay? The nine judgments reviewed here, two of the Cour administrative (the administrative court of appeal) and seven of the Tribunal administratif (the first-instance administrative court), decided between 2018 and 2026, answer these questions with remarkable consistency.

The legal framework

Article 164 LIR

Article 164 LIR has three paragraphs. Under paragraph 1, it is irrelevant for determining taxable income whether or not the income is distributed. Paragraph 2 treats as distributions those of whatever nature made to holders of shares, beneficiary units, dividend-right units or any other securities, including variable-income bonds. Paragraph 3 reads in our translation:

Hidden profit distributions are to be included in taxable income. There is a hidden profit distribution in particular where a shareholder, member or interested party receives, directly or indirectly, benefits from a company or an association which he or she would not normally have received had he or she not had that capacity.

The courts quote the same French wording, and it is identical to the consolidated text of 1 January 2026 that we translate. The Cour administrative explains the word “in particular” (notamment) by reference to the parliamentary materials (doc. parl. 5714, ad art. 239, p. 3): the formula was deliberately kept general so as to let the administration and the courts decide each case, given the difficulty of an exhaustive list (Cour administrative, 2 October 2025, no. 51646C, pp. 22–23). For companies, Article 162(1) LIR applies the personal income tax rules of Title I, including the deduction rule in Article 45(1) LIR: deductible operating expenses are those incurred exclusively by reason of the undertaking.

The withholding tax

Article 146(1) LIR subjects to withholding the dividends, profit shares and other income referred to in Article 97(1), point 1, LIR (a provision outside our translations). Article 148(1) LIR sets the rate at 15%. If the payer bears the tax, the withholding is calculated at 17.65% on the amount actually made available. In 40348, 43264, 48701, 49122 and 51646C the director added the same sentence: the payer bearing the tax “is never presumed, even in matters of hidden profit distributions” (for example 51646C, p. 14, quoting the director’s decision). The withholding is therefore assessed at 15% of the hidden distribution, not grossed up. Article 149(1) LIR makes the payer personally liable for the tax it withheld or should have withheld. Exemptions are in Article 147 LIR. In 43264 the director noted that the Jersey shareholder was not covered by the parent-subsidiary regime (Schachtelprivileg); none of the courts had to examine an exemption.

Procedure and proof

Three procedural rules frame every case. The first is Article 59 of the amended Law of 21 June 1999 on procedure before the administrative courts: “the proof of facts giving rise to the tax obligation lies with the administration, the proof of facts releasing from the tax obligation or reducing the tax lies with the taxpayer.” The second is the General Tax Law of 22 May 1931 (Abgabenordnung, AO), still applied in its German text. § 205(3) AO requires the tax office, before it assesses, to tell the taxpayer the points on which it intends to depart materially from the return to the taxpayer’s detriment. § 211(2), point 4, AO requires the assessment notice to state those points. § 217 AO allows the tax bases to be estimated (taxation) where they cannot otherwise be determined. The third is § 243 AO: a complaint (réclamation) to the director triggers a full re-examination, so the director may reform an assessment to the taxpayer’s detriment (in pejus). He did so in 42603, 48701 and 43264.

The test as the courts state it

The judgments repeat a settled formula. Its fullest version is in the Cour administrative’s judgment of 2 October 2025:

The essence of the notion of a hidden distribution must be derived from the principle laid down by Article 164(1) LIR that distributions may not reduce taxable income. The law thus distinguishes between the sphere in which income is earned, which determines taxable income, and the sphere in which income is used or distributed, which must not affect it. A hidden profit distribution is therefore a transaction which appears to have taken place in the course of earning income, but whose substance reveals that it is in reality a distribution, founded on the grant of a direct or indirect benefit to a shareholder, member or interested party, and which has caused either a decrease in assets or a failure of assets to increase.

The Court draws four consequences (pp. 23–24). First, the add-back is not income realised by the company but an “off-balance-sheet profit correction” (correction de bénéfice hors-bilan). Second, a hidden distribution exists where the shareholder receives benefits that represent for the company a use of income without effective consideration, which he could not have obtained without that link; the benchmark is that “a prudent and well-advised manager would not have granted a similar benefit to a third party.” Third, the shareholder relationship (Gesellschafterverhältnis) must be the cause of the benefit. Fourth, the circle of possible beneficiaries is limited to the company’s shareholders, members and “interested parties” (intéressés).

The Tribunal administratif adds two refinements, in identical words in 48701 (pp. 28–29) and 49122 (p. 20). “Effective consideration” means that the company received something of monetary value that has a direct economic link with the benefit it granted and is adequate compensation for it, assessed, where several transactions are linked, on their combined effects. And the benefit must, like a formal distribution, be capable of being classed as income from movable capital in the beneficiary’s hands. The Tribunal also states the logical link with Article 45: an expense that fails the exclusivity test is not deductible, but it is a hidden distribution “only if, in addition, the benefit arising from the company bearing the expense can be regarded as having been granted directly or indirectly to a shareholder, member or interested party in a form capable of giving rise to taxable income” (49122, p. 20, our translation).

Burden of proof. Reading Article 59 of the Law of 21 June 1999 together with Article 164(3), the burden lies first on the tax office. It must examine the return impartially and identify doubtful items. Where it can point to “a set of circumstances which make such a distribution probable and which the taxpayer has not explained or documented”, it may assume an undue reduction of profit without having to quantify it exactly. The burden then shifts: the taxpayer must prove that there was no reduction of profit, or that it is economically justified “and not merely motivated by special relations between two related entities” (51646C, pp. 23–24; the same formula in 40348, p. 10, 42603, p. 22, 48701, p. 29 and 49122, p. 20; 40348, 42603 and 48701 cite Cour administrative, 12 February 2009, no. 24642C).

Interested parties. The Tribunal administratif explained in 42603 that no direct relationship between the company and the beneficiary is required:

The only condition is whether the grant of such a benefit by the company is motivated by the shareholding link alone, so that the grant of that benefit to another person having sufficiently close links with the shareholder or member may also be regarded as a hidden distribution if the economic relationship between that grant and the shareholding link is established on the facts of the case.

In the cases reviewed, that circle included a shareholder’s spouse (41185 and 48701), his brother and the mother of his child (49122), and people close to the manager living free of charge in flats owned by the company (42603).

The manager’s private expenses and her personal liability: Tribunal administratif, 18 September 2024, and Cour administrative, 2 October 2025

Facts

Company (AA), an IT consultancy, had Madame (A) as sole manager from 20 March 2015. According to the director, she held 80 of its 100 shares. She lived, according to her, in Luxembourg but worked largely for clients in Belgium and France. After a request for information of 4 December 2018, the tax office, in one of two letters of 7 January 2019, asked for the loan contract behind her growing debt to the company. If there was none, she was to show a clear intention to repay, failing which the sums would be treated in full as hidden distributions. Her fiduciary, company (BB), replied on 14 January 2019 that there was no loan and that she would repay in instalments, the first in March 2019 and a second at the end of 2019 (Cour administrative, 2 October 2025, no. 51646C, pp. 2–3).

On 29 January 2019 the tax office sent its § 205(3) AO letter. Expenses would be “liquidated by way of hidden profit distribution within the meaning of Art. 164(3) LIR”, added back off-balance sheet and subjected to 15% withholding. The assessments for 2015 to 2017 followed on 20 March 2019, and the company complained by letter dated 18 June 2019. It was declared bankrupt by the tribunal d’arrondissement (district court) of Diekirch on 8 January 2020. On 29 September 2020 the tax office issued a liability notice (bulletin d’appel en garantie, Haftungsbescheid) under § 118 AO, making Madame (A) jointly liable for the company’s corporate income tax for 2015 to 2018, municipal business tax for 2015 to 2017, net wealth tax at 1 January 2018 and withholding tax for 2015 to 2017. She complained on 10 November 2021 and, with no answer from the director, went to the Tribunal administratif on 7 July 2022. On 10 August 2022, one month and three days later, the director rejected the company’s 2019 complaint. His decision was notified to the curator (curateur, the bankruptcy trustee), who did not appeal (TA 47662, p. 16; CADM 51646C, p. 19).

The director confirmed the following hidden distributions (51646C, pp. 10–14): - 80% of the leasing and fuel costs of three cars, estimated under § 217 AO for want of a logbook; - two private telephone subscriptions taken out in Madame (A)’s own name; - 80% of “management” costs, mostly restaurant, brasserie and café bills, some bearing only her name and others none, filed “in bulk” without explanation; - the rent for a flat and later a villa in Belgium leased in her own name, while the office rent of 18 m² at the registered office was accepted; - clothing, which was not contested.

The Tribunal administratif

The Tribunal administratif (18 September 2024, no. 47662), which calls the parties “Madame X” and “company A”, first declared the action inadmissible so far as it was brought directly against the company’s assessments. Under § 119(1) AO a person held liable must attack the decision holding him liable (“gegen seine Heranziehung”), not the principal debtor’s assessments. In any event, once the director had ruled, a direct action against the assessments had lost its object (pp. 14–16).

On the merits, the Tribunal applied § 119(2) AO. Where the tax debt has been finally established against the taxpayer, that finality binds anyone who could have challenged the assessment as the taxpayer’s representative. The company had complained, the director’s decision of 10 August 2022 had become final, and the curator, the company’s exclusive representative after the bankruptcy, had not appealed. The bankruptcy was “only a change of organ” with no effect on the company’s remedies (p. 19). Madame (A) could therefore raise only grounds against the liability notice itself, not against the existence of the hidden distributions (p. 20).

On liability, the Tribunal required, under § 109(1) AO, a culpable breach (schuldhafte Verletzung), damage and causation. Under § 2 StAnpG (the Tax Adaptation Law), the decision to pursue a manager is a matter of discretion to be exercised by equity and expediency. It found three faults (pp. 23–26): - late filing of the 2015 to 2017 returns on 7 October 2016, 4 May 2017 and 13 November 2018, after the 31 March deadlines; - non-payment of the tax due by 22 April 2019, with no request for a stay under § 251 AO, even after a payment order (contrainte) of 15 October 2019 was served on 28 November 2019; - above all, charging her own private expenses to the company as operating expenses, after leaving the § 205(3) letter of 29 January 2019 unanswered, so that they were requalified as hidden distributions.

On the third fault it said this:

Where the sole manager of a company has actively contributed to reducing the company’s actual receipts by means of hidden distributions of profits for her personal benefit, through deductions of expenses of a private nature, her conduct as sole manager of the company must be regarded as culpable within the meaning of § 109 AO.

The gap of four months to under two and a half years between the late returns and the assessments did not break the causal link (p. 27). The Tribunal dismissed the action, refused a procedural indemnity (indemnité de procédure) of €3,000 and ordered Madame (A) to pay the costs.

The appeal: grounds and the Court’s reasoning

Before the Cour administrative (2 October 2025, no. 51646C), Madame (A) did not challenge the inadmissibility of the direct action (p. 14). The State did not contest that her November 2021 complaint was in time, because it could not prove that the liability notice stated the available remedies (§ 211(2) AO) (pp. 14–15).

§ 119(2) AO. The Court reversed the Tribunal on this point. Its starting point was the same: a person held liable may raise both grounds against her own liability and grounds against the principal debtor’s tax, as an application of the assimilation in § 97(2) AO, unless § 119(2) applies (pp. 19–20). But the condition that she “would have been in a position to challenge” the assessment must be assessed in relation to her as the company’s representative, not to the company alone. From 8 January 2020 she had been removed from management and could no longer cause the company to go to court against the director’s decision of 10 August 2022 (p. 20).

The complaint of 18 June 2019 cannot be regarded as a sufficient remedy triggering the exclusion, provided for in § 119(2) AO, of a challenge to the assessments issued to the company of which she was the legal representative. Such an interpretation would deprive her of any judicial review of the disputed taxation, whose effects she may bear through the liability notice, and could not therefore be consistent with the fundamental principle of constitutional value of the rule of law in its aspects of access to a court and an effective remedy.

The Court cited the Cour constitutionnelle, 28 May 2019, no. 00146, its own judgment of 6 March 2025, no. 51780C, and Article 2 of the revised Constitution, in force since 1 July 2023. The right of recourse means the right to bring court proceedings after the complaint “with the whole of the statutory time limit” (p. 21). The State argued that she had organised the bankruptcy herself, by filing for it (faillite sur aveu). The Court rejected this, distinguishing its judgment of 19 November 2019, no. 43423C, where a bankruptcy filed immediately after the assessments revealed a “doubtful chronology”. Here the filing complied with the legal conditions governing cessation of payments. The State also pointed out that she had had nine days in which she could have sued on the director’s six-month silence before the bankruptcy. That was not a remedy “concretely and usefully open” (p. 21). The Tribunal had therefore been wrong to refuse to examine the hidden distributions (pp. 21–22).

The hidden distributions on the merits. The Court then examined each item itself, after the general statement of the test quoted above (pp. 22–24). As a preliminary point, it rejected the State’s attempt to show that Madame (A) was in fact resident in Belgium. The State relied solely on her logbooks, and the director on telephone and toll bills sent to a Belgian address. A challenge to residence under Article 2 LIR needs a set of concordant indications (pp. 25–26). The outcome on each item was nonetheless the same: - Car costs. No logbook existed for 2015. Those for 2016 and 2017 listed only business trips, without private trips or start-of-year and end-of-year mileage. Her client contracts provided for reimbursement of certain expenses, including fuel. A reimbursement by someone else bars deduction unless it was included in taxable receipts (Cour administrative, 29 October 2009, no. 25700C), and she did not prove that inclusion. The add-back was confirmed (p. 26). - Housing. She had signed two leases in her own name: one of 21 December 2015 for an unfurnished flat, for three years from 1 February 2016, and one of 2 August 2017 for a villa, for three years from 1 December 2017. She did not prove that the leases were successive rather than concurrent. Because the amounts added back appeared to concern the rent of only one dwelling, the Court held that the tax office had been entitled to treat that rent as outside Article 45 and as a hidden distribution (pp. 27–28). - Telephone. Without itemised bills, she failed to prove the business character of the subscriptions she said were needed before EU roaming charges ended (pp. 28–29). - Management costs. Invoices of 20 April 2015 (no. 1504021) and 30 June 2015 (no. 1506025) showed that company (AA) had recharged hotel costs to a client, which supported the State’s view that clients had reimbursed some of the costs. Club membership costs, which she conceded had been deducted on “erroneous advice” from her fiduciary, also failed (pp. 30–31).

Liability. The Court agreed that § 109(1) AO requires more than a breach of § 103 AO. A culpable breach is needed, and the decision to pursue is discretionary under §§ 2 and 7(3) StAnpG (pp. 33–34). It then departed from the Tribunal in two respects. The late filing was a fault, but the delays were not substantial, so it could justify liability only alongside other faults. And failing to answer a § 205(3) letter is no fault at all:

The taxpayer is not legally obliged to reply to a letter issued under § 205(3) AO. That letter is addressed to the taxpayer to inform it of the tax office’s intentions regarding its assessment so as to allow it to state its position, but does not trigger any obligation to react on its part.

The faults that did count were three (pp. 34–36). Charging private expenses to the company increased its tax burden and correspondingly impoverished it. The debit balance on her shareholder current account at 31 December 2015, 2016, 2017 and 2018 remained unpaid despite the repayment schedule she had announced to the tax office. And the company’s tax went unpaid, with no stay requested. The Court linked the last two: repaying the current account in 2019 would have allowed the company to pay much of its tax. Damage and causation were not otherwise contested.

Outcome

The appeal was dismissed and the judgment confirmed “on partly different grounds” (p. 36). The procedural indemnity of €3,000 was refused and Madame (A) was ordered to pay the costs of the appeal (pp. 36–37).

Cars for the shareholders and the unexplained 15% margin: Tribunal administratif, 11 November 2019, and Cour administrative, 2 July 2020

Facts

Company A, formed on 4 September 2007, bought, sold on hire purchase, hired out and financed motor vehicles, mostly prestige cars. Its partners were Monsieur A. B., also its sole manager, and Monsieur C. D. An ACD audit of 2012 to 2014 led to a report of 20 March 2017, assessments of 8 June 2017 and a director’s decision of 28 February 2018 (no. C 23868) rejecting the complaint. The director found that the irregularities pointed to deliberate tax evasion (Cour administrative, 2 July 2020, no. 43931C, pp. 2 and 30). Besides recharacterising long-term rentals as finance leases, the auditor treated the following as hidden distributions (pp. 10–17): - the difference needed to raise sales margins below 15% to a minimum of 15%; - for vehicles registered, insured and capitalised but under no contract and generating no revenue, a flat 1.5% per month of the acquisition price, as the value of making them available to the partners and their relatives; - 80% of fuel and telecommunication costs, on fuel cards used by the manager, his wife, who had no function in the company, and Monsieur C. D., and on some fifteen telephone numbers for a company that never had more than three employees; - household costs of the manager’s home, which was also the registered office of several other companies; - items such as luxury suitcases, a beer pump and a “spy helicopter”; - mooring for a boat; - deliveries of luxury vehicles to seaside resorts, received by Monsieur C. D.

The Tribunal administratif

The Tribunal administratif (11 November 2019, no. 41185) rejected the complaint of insufficient reasons, including the argument that Article 22(3) LIR required an item-by-item valuation: the auditor had grouped the lease contracts by type, so they were assets “similar in kind and value” that could be valued collectively (p. 40). It also upheld the finance-lease recharacterisation under § 11 StAnpG: a 36-month base period against an agreed useful life of 48 months gave 75%, between the 40% and 90% thresholds, and the residual price was below book value (pp. 37–45). On the hidden distributions, it relied on police reports and on reports of the anti-fraud service of the AED (the Administration de l’enregistrement, des domaines et de la TVA) of 17 June 2014 and 6 September 2016. These showed vehicles in the hands of people with no hire contract, and vehicles the company called stock but which, the manager admitted on 2 June 2014, were not in Luxembourg or in its warehouse. The company could not say where the vehicles were or who had them, so the burden shifted. Proof of business use would have required, in particular, a logbook (pp. 47–49).

The 15% margin was different. The Tribunal accepted that one vehicle bought and resold at a loss within a short time, in doubtful circumstances, might justify a higher margin. But the State had given no study or market reference for treating every margin below 15% as an undue benefit, and the Tribunal annulled those adjustments (p. 49). It confirmed the add-back of general expenses. The company had argued that its partners financed it with interest-free loans of “nearly one million euros in 2012, 2.6 million euros in 2013 and more than 4.6 million euros in 2014” (p. 33). The Tribunal held that these loans were not consideration for the private expenses, because there was no reciprocal link between the two (p. 52). It referred the margin point back to the director and split the costs equally (p. 53).

The appeal

The company appealed and the State cross-appealed on the margins. The Cour administrative confined itself to the grounds developed in the appeal petition, since first-instance pleadings do not count as grounds of appeal by mere reference (pp. 31–32). It held the reasons sufficient: the report, its tables per account and its Annex 1, which listed every vehicle with its tax classification and adjustment, allowed each item to be traced (pp. 32–34). It also confirmed the lease analysis. The contracts the company filed on appeal matched the standard terms, contained no right to terminate at will, and were filed “in bulk” without saying which ones were disputed (pp. 34–37). On the hidden distributions it held:

The appellant’s argument ultimately amounts to seeking to set off the benefit arising from the provision of cars granted by it against other benefits of financing without financial charges granted to it by its shareholders. Even if such a balancing could have been carried out, the benefits mutually granted would still have had to be correctly valued and recorded in the shareholders’ personal accounts. It cannot suffice to assert the existence of benefits granted by the shareholders which were not correctly taken into account in order to claim to set them off against benefits granted to the shareholders and likewise not correctly booked in the accounts of the company concerned.

The State’s cross-appeal failed for want of any specific argument. Neither the State nor the director had explained why a margin below 15% was unacceptable, or which price study showed 15% to match market practice (p. 38). Both appeals were dismissed and the judgment confirmed. The procedural indemnities claimed for both instances were refused, and the costs of the appeal were split three-quarters to the company and one quarter to the State (pp. 38–39).

Flats, property sales and a Paris home: Tribunal administratif, 20 January 2023

Facts

SOCIETE 1, formed on 22 June 2000, had as manager and beneficial owner a doctor of medicine and applied microbiology. Its stated object included acquiring immovable property “to be allotted to the shareholders for their enjoyment” or made available free to them. A director-ordered audit covering 2009 to 2015 (report of 24 September 2018) led to a decision of 3 January 2019 that reformed in pejus the assessments for 2009, 2010 and 2013 and partly allowed the complaint for 2014 (pp. 1–2). The director held that, because a shareholder must deal with “his” company as an unrelated third party would, an object clause allotting property to shareholders for their enjoyment could not be accepted for tax purposes (p. 13). The auditor’s findings included: - rent for two flats leased in the manager’s own name; - capital gains on property sales understated by side agreements under which money was paid to the manager’s private account; - a 50% unexplained write-down of his debit current account; - travel and car costs, and cable television at his home; - the costs of two flats in Paris used by his family (pp. 6–11).

The Tribunal’s reasoning

The Tribunal administratif (20 January 2023, no. 42603) held that the accounts, which the company admitted contained numerous errors, justified an estimate under § 217 AO. Even so, losses of 2007 and 2008 remained deductible, because Article 114(2), point 2, LIR requires proper accounts only for the year in which the loss arose (pp. 17–18). The company invoked legitimate expectations because the ACD had accepted the flat rents for 2008. That argument failed: a request for documents dated 27 March 2012 and the 2008 assessment showed no undertaking (pp. 20–21).

The flats. The leases were signed by the manager personally, without mention of the company, and concerned residential flats with a cellar and parking space. He was officially registered at that address. His claims that the flats served as offices sublet through another company, and that he actually lived elsewhere, were unsupported. The facts that he had personally rented the flats and that the company alone had paid the rent made a distribution probable. The burden shifted and was not discharged (pp. 21–23).

The property sales. Both sides had confused the land values and depreciated book values of two flats. The Tribunal therefore recomputed the capital gains itself under Article 99ter(2) LIR and Articles 25 and 26 LIR (pp. 24–25). For the 2010 sale, the ACD had only refused deduction of an unpaid invoice and had not treated it as a distribution, so the company’s complaint “misses the facts”. For the 2013 sale, the whole recomputed gain was a hidden distribution, because no payment had reached the company’s accounts and the sums had been paid to the manager’s private account, as a private letter of 11 December 2012 provided for part of them. This was a failure of the company’s assets to increase (p. 25).

Travel and other costs. The manager’s trip to Israel from 11 to 23 April 2014 was deductible. The company had bought an Israeli company by a contract of 7 April 2014 under which the price was payable within one month, and an Israeli lawyer’s attestation of 29 January 2019 confirmed meetings with banks to finance it. An unexplained provision included in the management costs and the cable television costs for the manager’s home remained add-backs (pp. 26–27).

The Paris flats. The income from the Paris flats was taxable only in France under Article 3(1) of the France–Luxembourg convention of 1 April 1958, so the related costs, depreciation and interest were not deductible in Luxembourg. The Tribunal added that, because the flats were made available free to people close to the manager, the costs borne by the company benefited them without consideration and were hidden distributions (p. 28). The company had argued that only a notional market rent should be treated as distributed, not the costs. That argument failed.

Outcome

The action was partly allowed. The 2010 and 2013 gains were fixed afresh, the 2013 gain being treated as a hidden distribution, and the Israel travel costs were allowed. The case was sent back to the ACD’s directorate for further action (renvoi en prosécution de cause), and the costs were split equally (pp. 28–29).

The guard dog and the camping car: Tribunal administratif, 19 November 2025

Facts

Company (AA), an accounting and tax firm formed on 7 May 2008, was owned and managed by Monsieur (A). After a request for information of 4 March 2020 and a § 205(3) AO letter of 1 July 2020, assessments of 7 October 2020 added back as hidden distributions for 2016 to 2018 the costs of a German shepherd, legal fees and a camping car. The company complained, and its complaint was received on 5 January 2021. The director sent his own request for documents on 22 September 2022 and, by decision of 13 December 2022, reformed the assessments in pejus (Tribunal administratif, 19 November 2025, no. 48701, pp. 2–3). His findings were these (pp. 8–15): - The dog. It was bought on 8 June 2016, capitalised and depreciated over five years, and said to guard the office at night. But it took part in dog shows in Belgium and France with Monsieur (A) recorded as owner at a Belgian address, and the vet’s invoices were sent there. - The house. Monsieur (A) and his wife bought a house in 2015 and leased it to the company from 1 July 2015 under a lease of 15 June 2015 that he signed on both sides. The lease put “everything relating to the building” on the tenant, including major works and legal costs. Under Article 5(3) of the Law of 21 September 2006 on residential leases, only current charges and minor repairs can be passed on to a tenant. The director held that the clause had been set up only to deduct the owners’ costs. Legal fees for the owners’ boundary dispute with neighbours, renovation and parking works, fire insurance in the owners’ names and a lawn tractor were all hidden distributions. - Private use of the house. The couple kept a bedroom of about 15 m² in a house of about 300 m², which gave a 5% private share of the rent for 2015 to 2017. They were registered there from 9 March 2018, and the director estimated the private share for 2018 at 30%. - The camping car. It was bought on 27 August 2018, financed by a loan from Monsieur (A) and his wife of 22 August 2018, and invoiced to him for its 2019 use only in early 2020, although the company’s object was accounting. - Other items. 80% of restaurant bills, including weekend meals and a snack bar near the couple’s home, and the wife’s driving lessons.

The Tribunal’s reasoning

The Tribunal administratif first excluded the company’s reply memorial, signed by a lawyer on list II of the Bar, who cannot sign procedural documents alone in direct tax cases before the administrative courts since the law of 16 December 2011. It excluded the State’s rejoinder with it (pp. 19–22). The action against the assessments themselves was inadmissible once the director had decided (p. 22). The § 205(3) AO complaint failed: the letter of 1 July 2020 listed each item, the percentage and the invoices, with an extended time to respond, and the company had answered in writing. A breach of § 211(2) AO, even if established, only stops the appeal period from running and does not annul the assessment (pp. 24–26).

On the merits, the company argued that the administration had confused the burden of proof under Article 45, which lies on the taxpayer, with that under Article 164(3), which lies first on the administration. The Tribunal answered as follows. The company had not challenged the director’s finding that the expenses were not deductible, so that finding had acquired the force of a decided matter (autorité de la chose décidée). It followed that the expenses had been incurred for the benefit of others:

This finding is, in itself, sufficient to conclude that there is a set of circumstances making the existence of hidden profit distributions probable, and more particularly a set of circumstances making probable the grant of a benefit without effective and equivalent consideration, which the claimant company has not explained or documented.

The beneficiary, Monsieur (A), was not disputed, the burden shifted, and the company offered no explanation at all. The Tribunal added that it was not its role to search the binders filed by the company for arguments the company had not made (p. 30). The action was dismissed, a procedural indemnity of €2,500 was refused, and the company was ordered to pay the costs (p. 31).

Interest-free loans to relatives, a villa and a Russian ball: Tribunal administratif, 27 March 2026

Facts

Company (AA), a real estate agency, was owned and run by Monsieur (B) as sole shareholder and managing director. For 2016 the tax office notified, by § 205(3) AO letter of 17 November 2021, and assessed on 15 December 2021, the following hidden distributions (Tribunal administratif, 27 March 2026, no. 49122, pp. 2–3): - notional interest at 5% under ACD circular L.I.R. no. 164/1 of 23 March 1998 on three receivables: an interest-free current account with Monsieur (A), who according to the national register was the shareholder’s brother; one with a dissolved property company (BB), whose beneficial owners were Monsieur (B) and Madame (C), the mother of his daughter; and one with Madame (C) herself, which carried interest of about 2.13%; - the excess over 5% of interest paid to Monsieur (B) on his loan to the company; - cash withdrawals and 40% of other expenses on a company Mastercard; - 40% of car costs, for want of a logbook; - the rent of a “representation office”; - sponsoring costs, including a table at a Russian ball.

The director confirmed everything on 4 April 2023 (pp. 4–11). Company (AA) went to court on 4 July 2023. It was declared bankrupt on 19 February 2024 by the tribunal d’arrondissement of Luxembourg, and its curator told the Tribunal that the case could proceed in her absence (p. 1). The company did not contest the add-backs for the shareholder’s loan or the card expenses (p. 12).

The notional interest rate

The company accepted that arm’s length interest was due but argued that 5% was too high. It said the circular was not binding and that Central Bank of Luxembourg (BCL) statistics for consumer credit showed rates between 2.79% and 3.84%. It relied on Article 56bis(3) LIR and on Cour administrative, 27 July 2022, no. 46801C (pp. 12–13). The Tribunal agreed on two points: the circular concerns current accounts of shareholders, and none of the three borrowers was a shareholder; and circulars are guidelines for officials, not sources of law, and are not binding on taxpayers (pp. 15–16). But it agreed with the State on the decisive point:

In the absence of any information on the terms of a loan, in particular the borrower’s financial situation or the guarantees of repayment, a normally prudent and diligent creditor granting a loan would not apply the average market interest rate but an interest rate exceeding the average market rate, in order to be remunerated for the risk of non-repayment incurred.

The company had produced no loan contract and nothing on the borrowers’ solvency, the maturity or any guarantee, which were the factors listed in 46801C. It filed no reply to the State’s reference to European Central Bank data showing 7.62% in December 2016 for revolving loans and overdrafts. The 5% rate therefore stood (pp. 16–17). The director had also rejected the argument that the dissolution of company (BB) on 10 July 2014 extinguished the receivable. Its assets and liabilities had passed to its partners, which had the same beneficial owners, so the company was still lending interest-free, indirectly, to its shareholder and Madame (C) (p. 7).

The expenses

As in 48701, the Tribunal held that the company had not contested non-deductibility under Article 45, so that point was a decided matter (p. 19). It then examined each item in some detail: - The villa. A “convention for the provision of a representative office” of 2 January 2012 with the owner, company (FF), covered “the villa” for “occasional occupation” as a representative office, and bound Monsieur (B) “personally” to manage the whole building. Monsieur (B) had been registered there from 31 May 2002 to 11 September 2015, and in 2016, according to a list drawn up by the company itself, Madame (C) lived there. The price paid seemed high for a single room. The attestations of former employees were undated and did not exclude private use. Madame (C), as the mother of the shareholder’s child, was an interested party (pp. 21–22). - The car. The company admitted it kept no logbook, and its general assertion of business use was no proof. The 40% estimate stood (pp. 22–23). - The sponsoring. The company had itself explained that it booked a table for eleven guests at the 2016 Russian ball, including the shareholder and two close relatives, without explaining what the other guests had to do with its business (pp. 24–25). As the director had noted, the company did not appear on the posters it filed (p. 11).

Outcome

The action was dismissed in full, a procedural indemnity of €4,000 was refused, and the company was ordered to pay the costs (p. 26).

A 12% shareholder loan: Tribunal administratif, 22 October 2018

Facts

The company, formed on 20 November 2007, bought a property in France in 2008. According to the director, it was near Saint-Tropez. Part of the price was financed by a loan from its sole shareholder at 12%, effective from 1 January 2011. The loan was unsecured, and the company had negative retained earnings and losses in 2011 and 2012 (Tribunal administratif, 22 October 2018, no. 40348, pp. 1 and 4–5). The tax office first accepted only the 12-month interbank rate: 1.87% for 2011 and 0.82% for 2012. In its assessments of 26 November 2014 it added a risk premium of 1.7%, citing Cour administrative, 13 June 2007, no. 23053C, which gave 3.57% and 2.52%. The excess interest was treated as a hidden distribution and subjected to withholding (pp. 1–2). The director’s decision of 7 August 2017 recorded that, in its complaint, the company accepted that 12% was excessive. Its transfer pricing study of 7 October 2014 found arm’s length ranges between 2.39% and 7.88%; within the upper-quartile range of 3.21% to 7.88%, the 2011 rate admitted fell inside the band. The study relied on unverified information from the company and covered only 2011 (pp. 5–6).

The Tribunal’s reasoning

Before the Tribunal administratif, the company argued that Article 164(3) embodied the arm’s length principle of Article 9 of the OECD Model Convention and the OECD Guidelines of 22 July 2010. It also relied on ACD circular L.I.R. no. 164/2 of 28 January 2011 on financing transactions and on a second study of 7 November 2017 that justified 12%. The Tribunal answered:

The interpretation and application of Article 164, paragraph 3, LIR cannot be directly influenced by the principles deriving from Article 9 of the Model Convention, in particular because, first, the origin of Article 164, paragraph 3, LIR lies well before the adoption of the first version of the Model Convention; second, the scope and purpose of Article 164, paragraph 3, LIR are narrower than those of Article 9, in that it applies only to relations between a collective entity and its shareholders or members and only to benefits in the nature of a receipt capable of being classed as income from movable capital.

The third reason was that tax treaties only limit taxing powers created by domestic law and do not change the meaning of a pre-existing domestic provision that does not refer to them (pp. 9–10). On the facts, the size of the gap between 12% and the rates admitted, which were also supported by the company’s first study for 2011, made a distribution probable, and the shareholder fell within the circle of beneficiaries (pp. 10–11).

The Tribunal admitted the second study although it was drawn up after the decision. A judge hearing an action for reformation (recours en réformation) decides the case afresh and takes account of facts as they stand when he rules (p. 11). But the two studies were irreconcilable: 3.21% to 7.88% against 9.95% to 19.61%, using the same comparable uncontrolled price method. The company also said, at once, that the rate reflected high risk and that it could expect a large return from a rising property market, “revealing that the investment was not risky” (p. 12). Its fallback request for 7.88% failed for the same reason. Its last fallback, 5% under circular 164/1, failed because it did not show that it fell within the circular, which the Tribunal described as concerning relations between shareholders who are natural persons and their company (p. 12). The action was dismissed, with costs against the company (p. 13).

A profit participating loan under an advance tax agreement: Tribunal administratif, 13 July 2021

Facts

Company B, formed on 27 November 2012, acquired on 26 April 2013 all the shares of an Irish company (company C) from its sole shareholder, a Jersey company (company A). It financed 15.11% of the price with equity and 84.89% with a profit participating loan (PPL) from that shareholder. The PPL carried fixed interest of 0.25% and variable interest equal to 100% of adjusted net profits, less the fixed interest and a margin. The request for an advance tax agreement dated 12 June 2013 described the variable interest as 99% of net profits and asked for confirmation that the yield was interest, not a hidden distribution (Tribunal administratif, 13 July 2021, no. 43264, pp. 1–5 and 10).

A letter of 6 March 2014, which the company said it never received, rejected the request: 99% of the yield could not be deductible where the Irish participation was financed at 85% by debt. A letter of 28 March 2014 then approved the treatment, binding for tax years 2013 to 2017, subject to four reservations. One was that the total yield must not exceed an arm’s length remuneration on an accrual basis (p. 2).

For 2015, the tax office treated variable interest above 85% of the commercial profit as a hidden dividend. Its withholding notice was wrongly issued for 2016 and was withdrawn under § 299(3) AO, and a new notice for 2015 followed on 11 July 2018 (pp. 2–6). The director, by decision of 2 May 2019 (no. C 25467), reformed it in pejus on a new basis. He accepted that the PPL could be compared with an ordinary interest-bearing loan and that the company’s benchmark median of 8.47% was “not to be criticised” (p. 9). But he held that an investor would never accept owning a company that pays all its profit away as interest and no dividend. A shareholder dealing at arm’s length would have received at least a dividend in proportion to its equity, so 15.11% of the interest was a hidden distribution subject to 15% withholding (pp. 9–11). He recalled that the arm’s length principle is embodied in Articles 56 and 164(3) LIR, noting that Article 56bis LIR has been in force only since 1 January 2017 (p. 8).

The Tribunal’s reasoning

The Tribunal administratif analysed the agreement under the general principles of legitimate expectations and legal certainty, since advance rulings were not then regulated by statute. Four conditions must be met: a written question fully setting out the facts; an answer from a competent official; an intention to be bound, meaning an answer without restrictions or reservations; and a decisive influence on the taxpayer (pp. 25–26). Only the third condition was disputed. The Tribunal held that the 28 March 2014 approval implicitly but necessarily withdrew the refusal of 6 March 2014, which it neither mentioned nor reflected in its reservations. The 15/85 ratio, set out in the request, was therefore “definitively endorsed” (p. 26). The same went for the 0.25% fixed and 99% variable interest and the characterisation of the payments as interest rather than dividends. The director could not reopen these points by substituting new reasons for the tax office’s (pp. 26–27):

Even though the arrangement had the effect that the claimant paid almost all of its profits, representing in the end the dividend received from [C], to the PPL counterparty as variable interest without distributing a single cent as a dividend to its sole shareholder, that way of proceeding was precisely the subject of the request for an advance decision, which was granted subject only to the reservation, relevant for the case, that the interest so stipulated corresponds to a rate such as would also have been applied between unrelated companies.

On that reservation, the company’s study had found an arm’s length range of 7.26% to 10.71%. Its recalculation for 26 April 2013 to 31 December 2015 gave 9.81%, inside the range. The director had dismissed this without detailed reasons. The State’s argument that no unrelated lender would lend without equity or security only attacked the financing that the agreement had approved (p. 28).

Outcome

The decision was reformed: no part of the interest was a hidden distribution and no withholding tax was due for 2015. The State was ordered to pay the costs (pp. 28–29).

How the judgments fit together

One test, applied item by item. Every judgment applies the same elements: a benefit without effective consideration, a decrease in assets or a failure of assets to increase, a cause in the shareholder relationship, the prudent manager benchmark, and the shifting burden of proof. The courts apply them item by item, and the outcome depends on evidence. Logbooks, itemised bills, contracts and contemporaneous allocations decided the cases far more often than legal argument did. Where the taxpayer had evidence, it won on the point: the Israel trip in 42603, the advance agreement and benchmark in 43264. Where the administration had none, it lost: the unexplained 15% margin in 41185 and 43931C.

Deductibility and distribution: two questions that tend to merge. The Tribunal states that a non-deductible expense is a hidden distribution only if the benefit also reached a shareholder or interested party (49122, p. 20). In 48701 and 49122, however, it held that an uncontested finding of non-deductibility is “in itself sufficient” to make a distribution probable, because the expense must then have been incurred for others. In the Cour administrative’s judgment of 2 October 2025, the analysis is mostly about whether each expense met Article 45, and the classification as a distribution follows once Madame (A)’s position as shareholder and manager is established (p. 24). The practical lesson is that a taxpayer who contests only the distribution, and not the non-deductibility, has largely lost already. The judgments do not explain how this sits with the requirement that the benefit be capable of being income from movable capital in the beneficiary’s hands, which the Tribunal lists as a separate element (48701, p. 29). Nor do they address a non-deductible expense that benefits no one connected with the shareholder.

Estimates are acceptable; arbitrary rules are not. The courts upheld estimated private shares under § 217 AO where the taxpayer kept no records: 80% in 51646C and 43931C, 40% in 49122, 5% and 30% in 48701. A percentage without any factual basis was not upheld. The 15% minimum margin failed at both levels because the State could cite no study or market practice.

Interest: arm’s length in substance, not by formula. Three judgments deal with loan terms. In 40348, the Tribunal administratif refused to read Article 164(3) through Article 9 of the OECD Model but still decided the case by comparing rates. It accepted an interbank rate plus a 1.7% premium and rejected inconsistent studies. In 49122 it held that the 5% circular rate binds no one, yet upheld 5% because the company gave no information about the loans and the State’s market data supported a higher rate. In 43264 it accepted a benchmark range and a point within it, because the administration had not rebutted it. The common thread is the burden of proof. Once a gap from market terms is shown, the company must prove its rate with a coherent analysis of the actual loan. The director in 43264 tied Article 164(3) to the arm’s length principle in Article 56 LIR, while the Tribunal in 40348 stressed that Article 164(3) has a narrower scope. Since 1 January 2017, Article 56bis LIR has codified the comparability analysis for related enterprises; the company in 49122 relied on it, but none of the judgments applies it. Our review of the arm’s length principle in the State aid cases and the Luxembourg courts takes this further. Our review of debt and equity, hidden capital and interest requalified as dividends covers the separate question of when a shareholder loan is equity.

No informal set-off. Both instances in 41185 and 43931C refused to net the shareholders’ benefits against interest-free loans they had made to the company. The Tribunal saw no reciprocal link. The Cour administrative added that set-off would in any case require both advantages to have been properly valued and booked (p. 38).

Advance agreements as a shield. In 43264 the advance agreement protected the taxpayer against a recharacterisation by the director that was, in substance, a debt-equity argument dressed in arm’s length language. The director could not recharacterise on grounds the agreement had approved, and the only open question was the reservation actually stated.

Procedural safeguards cut both ways. The § 205(3) AO letter is a substantial formality, and its breach annuls the assessment (48701, p. 25), but a summary indication suffices. A breach of § 211(2) AO only suspends the appeal period. And there is no duty to answer the § 205(3) letter, so silence is not a fault for liability purposes. The Cour administrative expressly corrected the Tribunal on that point in 51646C.

Tension between the two instances in 51646C. The Tribunal administratif treated bankruptcy as a mere change of company organ under § 119(2) AO. The Cour administrative required an effective remedy in the hands of the person held liable, based on the constitutional principle of the rule of law. Both courts reached the same result, because the distributions were confirmed on the merits. But the appellate reasoning means that a manager removed by bankruptcy before the director decides can contest the underlying assessments in her own liability proceedings. The Court distinguished a bankruptcy filed immediately after the assessments, with a “doubtful chronology”, as in 43423C.

What it means in practice

The judgments point to recurring risk areas for owner-managed companies, family holding companies and their managers. - Mixed-use assets. Cars, phones, homes used as offices, boats and camping cars are presumed to have a private element unless records prove otherwise. Keep a logbook that lists all trips, with start-of-year and end-of-year mileage, not only business trips (51646C, p. 26). Keep itemised phone bills. - Expenses with a private flavour. For restaurant, representation and sponsoring costs, record the client, the project and the guests. Bills filed “in bulk” are disregarded (the director’s decisions quoted in 51646C, p. 12, and 48701, p. 14). Weekend meals and events attended by the shareholder’s family invite add-backs. - Contracts in the shareholder’s name. Leases, subscriptions and insurance in the shareholder’s own name, paid by the company, are strong indications of a distribution (42603; 51646C; 48701). Where a lease between the shareholder and the company shifts the owner’s costs onto the company, expect it to be disregarded (48701). - Reimbursements. If clients reimburse costs, show that the reimbursements were booked as receipts; otherwise the costs are not deductible (51646C, pp. 26 and 31). - Loans to and from shareholders and relatives. Document every current account and loan with a contract, a rate, a maturity and security, and with evidence on the borrower’s solvency. Without these, the courts accept a rate above market averages (49122). Interest paid to a shareholder needs a benchmark that is internally consistent and specific to the loan (40348). A promise to repay a debit current account that is not kept can later count against the manager (51646C, p. 35). - Shareholder support. Interest-free shareholder loans do not offset benefits the company gives the shareholders unless both are valued and booked (43931C). - Advance agreements. An agreement binds on what it actually approves. Its reservations, here the arm’s length yield, remain open to review (43264). Keep the request, the annexes and the benchmark. - Contesting. Challenge non-deductibility as well as the distribution, item by item and with evidence. The Tribunal will not search the files for you, and an uncontested finding on Article 45 becomes a decided matter (48701, pp. 28–30; 49122, p. 19). In direct tax cases, check who signs each memorial (48701). - Managers. A hidden distribution for the manager’s benefit can found personal liability for the company’s taxes, including the withholding tax, under §§ 103, 108 and 109 AO (51646C; 47662). Paying the tax on time or seeking a stay under § 251 AO, and settling debit current accounts, reduce that exposure.

Status

The two Cour administrative judgments confirm the first-instance judgments: no. 51646C on partly different grounds, no. 43931C in full, with the State’s cross-appeal also dismissed. In 41185 the adjustments for sales margins were annulled and the file sent back to the director, and the appeal left that unchanged. In 42603 the file was sent back to the ACD’s directorate to give effect to the recomputed gains and the allowed travel costs.

For the five Tribunal administratif judgments that were not themselves the subject of a reviewed appeal (nos. 40348, 42603, 43264, 48701 and 49122), no appeal judgment is among the sources. The most recent, no. 49122 of 27 March 2026, concerns a company in bankruptcy since 19 February 2024.

On the legislation, the wording of Article 164(3) LIR that all the courts apply is the same as in our current translation. The 15% rate in Article 148(1) LIR is unchanged in our current text. Article 56bis LIR, which the director in 43264 dated to 1 January 2017 and which our act page attributes to the Law of 23 December 2016, was not applied in any of the judgments; the interest cases concern tax years 2011 to 2016, before its entry into force. The judgments also refer to ACD circulars L.I.R. no. 164/1 of 23 March 1998 and no. 164/2 of 28 January 2011, which are not part of our translations and which, according to the Tribunal administratif in 49122, are not binding on taxpayers.

Provisions discussed

• Income Tax Law: Art. 164, Art. 45, Art. 146, Art. 148, Art. 22, Art. 114

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.