The arm’s length principle in Luxembourg: the State aid appeals (Fiat, Amazon) and the administrative courts

The judgments

The question

Transactions between companies of the same group are not priced by a market. Luxembourg tax law corrects their prices for tax purposes through three provisions of the Income Tax Law (LIR): the rule on hidden profit distributions in Article 164(3), the arm’s length rule in Article 56 and the transfer pricing method in Article 56bis. For groups with Luxembourg finance, holding or principal companies, two questions follow. Can the European Commission treat a Luxembourg ruling that accepted a transfer price as State aid because, in its view, the price was not at arm’s length? And how do the Luxembourg courts apply the arm’s length principle when the tax authority, the Administration des contributions directes (ACD), corrects a group company’s profit?

The Court of Justice answered the first question in two appeals: Fiat Chrysler Finance Europe (8 November 2022) and Commission v Luxembourg and Amazon (14 December 2023). Both turned on the content of Luxembourg law at the time of the rulings. The second question is answered by four cases in the administrative courts, the Tribunal administratif (administrative court of first instance) and the Cour administrative (administrative court of appeal), decided between 2022 and 2026 on tax years from 2012 to 2017. Because Article 56 was rewritten from 1 January 2015 and Article 56bis applies from 1 January 2017, the version of the law matters in each case, and the courts say so.

The legal framework

Article 164(3). Hidden profit distributions are 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” (Article 164(3), our translation). Advocate General Kokott quoted the same wording in Amazon (point 7). The Commission identified it as the Luxembourg basis of both the Fiat and the Amazon rulings (Fiat, para. 11; Amazon, para. 2). Advocate General Pikamäe stated in footnote 7 of his Opinion in Fiat that the provision was no longer in force because Luxembourg had introduced new Articles 56 and 56a on 1 January 2017; our consolidated text of 1 January 2026 still contains Article 164(3) in the words he quoted, and the Tribunal administratif applied it to the 2017 tax year (Tribunal administratif, 6 June 2025, no. 47100).

Article 56 before 2015. For tax years up to 2014, Article 56 did not state an arm’s length test. As quoted by the Tribunal administratif (18 March 2026, no. 48905, p. 36), it allowed a senior official of the ACD, of at least the rank of inspecteur de direction, to fix the operating result on a flat-rate basis, “regardless of the result shown”, where a transfer of profit was made possible by special economic relations, direct or indirect, with a person who was not a resident taxpayer (our translation). The director of the ACD described the old provision in the same way: it concerned the flat-rate fixing of profit in the case of special economic relations with foreign persons (decision of 17 July 2019, quoted in Cour administrative, 21 September 2023, no. 47391C, p. 6). The parliamentary commentary on the provision, cited in no. 48905 (p. 37), adds that the administration need not prove that profit was actually reduced; it may presume it where the circumstances make it probable, and the taxpayer must then disprove it.

Article 56 from 2015. Article 9 of the Law of 19 December 2014 on the “paquet d’avenir” rewrote Article 56 with effect from 1 January 2015 (no. 47391C, p. 6). The new text, quoted in no. 48905 (pp. 36 to 37) for the 2015 tax year, is the one in our translation: where one enterprise participates directly or indirectly in the management, control or capital of another, or the same persons participate in two enterprises, and the two are bound in their commercial or financial relations by conditions that differ from those which would be agreed between independent enterprises, “the profits of those enterprises are determined on the basis of the conditions prevailing between independent enterprises and taxed accordingly” (Article 56). Our text records amendments to Article 56 by the Laws of 19 December 2014 and 23 December 2016; the 2015 wording quoted by the Tribunal is identical to our current text. The parliamentary documents (doc. parl. no. 6722), quoted by the ACD’s revision service in no. 48905 (p. 16), link the new provision to Article 9(1) of the OECD Model Tax Convention.

Article 56bis from 2017. Article 3, point 2°, of the Law of 23 December 2016 inserted Article 56bis, applicable from 1 January 2017 (no. 47391C, pp. 6 to 7). It defines related enterprise, transaction, controlled transaction and arm’s length price (Article 56bis(1)), requires the comparability analysis and the accurate delineation of the controlled transaction (Article 56bis(3) and (4)), lists the comparability factors, including the functions performed, “taking into account the assets used and the risks managed and assumed” (Article 56bis(5)), requires the method giving “the best possible approximation of the arm’s length price” (Article 56bis(6)) and allows transactions without valid commercial rationality to be disregarded (Article 56bis(7)).

Circulars. Circular L.I.R. No 164/2 of 28 January 2011 explained how to determine an arm’s length remuneration for intra-group financing companies (Fiat, para. 11). According to the Cour administrative (23 November 2023, no. 48125C, pp. 16 to 17), it applied until 1 January 2017 and allowed the capital at risk to be capped at 1% of the nominal value of the loan granted or at €2 million; it was replaced by Circular L.I.R. No 56/1 – 56bis/1 of 27 December 2016, which requires the sufficient level of capital at risk to be set case by case.

Hidden contributions. Profit is the difference between net invested assets at the end and at the beginning of the year, increased by withdrawals and reduced by additional contributions (Article 18(1)). All assets that the taxpayer incorporates into the undertaking are additional contributions (Article 42(1)), valued at their going-concern value (Article 43(1)). The courts treat a benefit granted by a shareholder to its company because of the shareholding as a hidden contribution (apport caché), the mirror image of a hidden profit distribution.

Burden of proof. Under Article 59 of the Law of 21 June 1999 on procedure before the administrative courts, the administration proves the facts that create the tax liability and the taxpayer proves the facts that remove or reduce it. All four Luxembourg cases turn partly on this rule.

The tax years and versions in the cases reviewed here are:

• Amazon: ruling of 6 November 2003, applied to 2006 to 2014; old Article 56 and Article 164(3).
• Fiat: ruling of 3 September 2012, binding for 2012 to 2016; Article 164(3) and Circular 164/2. The Court of Justice does not mention the 2015 version of Article 56.
• No. 47391C: tax year 2014; old Article 56; Article 56bis not yet applicable.
• No. 48905: tax years 2012 to 2014 (old Article 56) and 2015 (new Article 56).
• No. 48125C: tax year 2016; new Article 56 and Circular 164/2; Article 56bis not yet applicable.
• No. 47100: tax year 2017; Articles 56 and 56bis and Article 164(3).

Fiat Chrysler Finance Europe v Commission (C-885/19 P and C-898/19 P)

The ruling. Fiat Chrysler Finance Europe, formerly Fiat Finance and Trade Ltd (FFT), provided treasury services and financing from Luxembourg to the Fiat/Chrysler group companies in Europe outside Italy (para. 8). On 14 March 2012 its tax adviser asked the ACD to approve an advance transfer pricing agreement. On 3 September 2012 the ACD confirmed that the transfer pricing analysis “has been realised in accordance with the Circular 164/2 of the 28 January 2011 and respects the arm’s length principle” (para. 4). The ruling was binding for five years, from the 2012 to the 2016 tax year (para. 10).

The Commission’s decision. After requests for information from 19 June 2013, a decision requiring information of 24 March 2014 and the opening of the formal investigation on 11 June 2014, the Commission adopted Decision (EU) 2016/2326 on 21 October 2015 (paras 5 to 7). It took as the reference system the general Luxembourg corporate income tax system, whose objective was to tax the profits of all resident companies, and rejected Luxembourg’s and FFT’s argument that Article 164 or Circular 164/2 formed the reference system (para. 16). It held that the arm’s length principle “necessarily forms part” of its assessment under Article 107(1) TFEU “irrespective of whether a Member State has incorporated that principle into its national legal system”, and said it had not examined whether the ruling complied with Article 164(3) or the Circular (para. 19). As described by Advocate General Pikamäe (points 20 to 24), the Commission objected that the ruling used a hypothetical regulatory capital of €28.5 million instead of accounting equity of €287.5 million for 2011, which divided FFT’s taxable remuneration by 10; that it gave a zero return to the equity supporting FFT’s investments in two group subsidiaries (FFNA and FFC); that it used a beta of 0.29; and that the resulting pre-tax return on equity of 6.05% was well below the 10% or more observed in the financial sector. In the alternative the Commission found an advantage under the narrower reference system of Article 164(3) and the Circular (para. 21), and it rejected the argument that the ruling should be compared with the ACD’s practice under the Circular, including the rulings for 21 other taxpayers from 2010 to 2013 that Luxembourg had supplied (paras 21 and 86).

The General Court. By judgment of 24 September 2019 (T-755/15 and T-759/15) the General Court dismissed the actions of Luxembourg and FFT. Where national law does not distinguish between integrated and stand-alone undertakings for corporate income tax, it held, the Commission may compare the integrated company’s tax burden with that of an undertaking trading under market conditions; the arm’s length principle is a “tool” or “benchmark” for that comparison (paras 30 and 31). The OECD Guidelines reflected “the international consensus achieved with regard to transfer pricing” and had “a real practical significance” (para. 101).

The Advocate General. Advocate General Pikamäe delivered his Opinion in FFT’s appeal on 16 December 2021 and proposed that it be dismissed (point 208). He considered the General Court’s reasoning on the legal basis of the principle clear and consistent (point 69), although its reliance on Belgium and Forum 187 (C-182/03 and C-217/03) was “mistaken”, because that judgment had concerned a cost-plus method that Belgian law itself had incorporated (points 79 to 84). On the merits he endorsed the General Court’s standard of review, under which the Commission must show that the errors “go beyond the inaccuracies inherent in the application of a method designed to obtain a reliable approximation of a market-based outcome”, and he read the national authorities’ margin of appreciation as one that is “in no way described as ‘broad’” (points 116 to 118). He rejected FFT’s criticism of the treatment of its capital (points 119 to 135) and its argument that any advantage was neutralised at group level by higher tax in Italy (points 141 to 168). He also observed that, in his separate Opinion in Ireland’s appeal (C-898/19 P), he proposed that the Court strike down the General Court’s conclusions as to the basis of the arm’s length principle (point 193).

The judgment. The Grand Chamber examined Ireland’s appeal first, and within it the fifth and sixth parts of the first ground and the fifth ground (para. 55). Ireland argued that the arm’s length principle may be used to test for an advantage only if it forms part of the national tax system that constitutes normal taxation (para. 56). The Commission’s objection that this attacked findings of fact on national law failed: whether the General Court correctly defined the reference system and applied a legal test such as the arm’s length principle is a question of law (paras 81 to 85).

On the substance, the Court recalled that the reference system must follow from “an objective examination of the content, the structure and the specific effects of the applicable rules under the national law” (para. 72), that outside harmonised areas the Member State defines the characteristics of the tax (para. 73), and that “only the national law applicable in the Member State concerned must be taken into account” (para. 74). By dismissing Article 164(3) and Circular 164/2, the Commission had applied an arm’s length principle different from the one defined by Luxembourg law (para. 91). The Court accepted that Luxembourg law was intended to bring about a reliable approximation of the market price for integrated companies, but “the specific detailed rules for the application of that principle are defined by national law” (para. 93). On the OECD Guidelines it held:

Parameters and rules external to the national tax system at issue cannot therefore be taken into account in the examination of the existence of a selective tax advantage within the meaning of Article 107(1) TFEU and for the purposes of establishing the tax burden that should normally be borne by an undertaking, unless that national tax system makes explicit reference to them.

This, the Court added, expresses the principle of legality of taxation (para. 97). Luxembourg had explained that Circular 164/2 contained specific rules for group financing companies, under which activities linked to the holding of participations were not to be taken into account; the Commission had not taken those choices into account (paras 98 and 99), and had “avoided any examination” of how the principle as enshrined in Article 164(3) had been interpreted and applied (para. 100). Forum 187 did not establish an autonomous arm’s length principle (paras 102 to 104). The Commission’s subsidiary reasoning based on Article 164(3) did not save the decision, because for the proper application of that provision it referred back to its principal analysis; it rectified the error “only in a superficial manner” (paras 109 to 112).

The Court set aside the judgment and gave final judgment itself (paras 113 to 116). It annulled the decision because the Commission had found a selective advantage against an arm’s length principle that did not derive from a full examination of national law, and had thereby also infringed Articles 114(2) and 115 TFEU (para. 117). It left room for future cases:

In particular, after having observed that a Member State has chosen to apply the arm’s length principle in order to establish the transfer prices of integrated companies, the Commission must … be able to establish that the parameters laid down by national law are manifestly inconsistent with the objective of non-discriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system, by systematically leading to an undervaluation of the transfer prices applicable to integrated companies or to certain of them, such as finance companies, as compared to market prices for comparable transactions carried out by non-integrated companies.

The Commission was ordered to pay Ireland’s costs of appeal and all the costs at first instance; there was no need to rule on FFT’s own appeal, and each party bore its own costs in it (paras 114 and 125 to 129).

Commission v Luxembourg and Amazon (C-457/21 P)

The ruling. In the 2006 restructuring of the Amazon group’s European business, Amazon Europe Holding Technologies SCS (LuxSCS), a Luxembourg limited partnership with US partners, obtained rights to the group’s technology, customer data and trade marks under a buy-in agreement and a cost-sharing agreement with US group companies, and licensed them, with effect from 30 April 2006, to Amazon EU Sàrl (LuxOpCo), the group’s European headquarters and principal operator, against a royalty (para. 2, reproducing paras 3 to 5 and 24 of the General Court’s judgment). By letters of 23 and 31 October 2003, Amazon.com asked the ACD to confirm that the method for setting the royalty would give LuxOpCo an “appropriate and acceptable profit” with respect to the transfer pricing policy and Article 56 and Article 164(3) LIR. The ACD approved both letters on 6 November 2003; the ruling was extended in 2010 and applied from 2006 to 2014 (para. 2). As set out by Advocate General Kokott (point 19), LuxOpCo’s return was a percentage of its EU operating expenses (capped by the EU operating profit), but never less than 0.45% or more than 0.55% of EU revenue, and the royalty took the rest of the operating profit.

The Commission’s decision and the General Court. In Decision (EU) 2018/859 of 4 October 2017 the Commission noted that Article 164(3) “was interpreted by the Luxembourg tax administration as enshrining the arm’s length principle”, presented the OECD Guidelines of 1995, 2010 and 2017, and held that LuxSCS performed no unique and valuable functions, so that LuxSCS, not LuxOpCo, should have been the tested party under the transactional net margin method, with a lower royalty and a higher Luxembourg tax base (paras 2 and 9). Three subsidiary findings attacked the functional analysis, the profit level indicator and the 0.55% ceiling. By judgment of 12 May 2021 (T-816/17 and T-318/18) the General Court annulled the decision: the tested party was wrongly chosen, the Commission’s calculation was not reliable, and none of the subsidiary findings showed an actual reduction of LuxOpCo’s tax burden (paras 7 to 10). The General Court had rejected as inadmissible Ireland’s argument on the legal basis of the arm’s length principle applied by the Commission (para. 48; AG, points 38 and 39).

The appeal and the Advocate General. The Commission argued that the reference system was not in dispute, so that Fiat had no bearing (AG, point 4). Advocate General Kokott, in her Opinion of 8 June 2023, disagreed: the correct reference system is a condition sine qua non of any finding of selective advantage and is reviewable even if the applicants did not challenge it expressly (points 57 to 63). On the substance, the decision cited the 1995, 2010 and 2017 Guidelines while Luxembourg law did not appear to have played any role (points 68 and 69). Luxembourg had confirmed that its practice in 2003 took the 1995 Guidelines into account as principles of interpretation, without legal force (point 74). A consistent administrative practice giving content to the concept of hidden profit distribution “could be sufficient” to bring the Guidelines into the reference system, but the Commission would have had to investigate and describe it, and a 2003 practice could not have reflected Guidelines adopted in 2010 and 2017, such as the DEMPE functions (points 72 and 75 to 77).

In the alternative she proposed a restricted standard of review for individual tax assessments and rulings:

It follows, then, that not every incorrect tax ruling but only those which are manifestly erroneous in favour of the taxpayer constitute a selective advantage. Derogations from the applicable national reference system are manifestly erroneous if they cannot be plausibly explained to a third party, such as the Commission or the Courts of the European Union, and are therefore equally evident to the taxpayer concerned.

On that test, the choice of the comparable uncontrolled price method and of LuxOpCo as tested party was not manifestly wrong (points 97 to 100). The 0.55% ceiling did, “in my view manifestly”, fail the arm’s length principle, but the Commission had not shown an advantage because LuxOpCo’s remuneration stayed within an arm’s length range (points 116 and 117).

The judgment. The Second Chamber held the Commission’s arguments admissible: whether the General Court correctly defined, interpreted and applied the reference system is a question of law (paras 20 to 23). It then drew two consequences from Fiat. First, “the arm’s length principle can only be applied if it is recognised by the national law concerned and in accordance with the detailed rules defined by it”; there is no autonomous arm’s length principle in EU law (para. 42). Second, the OECD Guidelines bind no OECD member and count only where national law refers to them explicitly (para. 44). The General Court had erred by allowing the Commission to apply the principle without first checking that it was incorporated into Luxembourg law (para. 46) and by treating the Guidelines as having “a certain practical significance” (para. 47). Its whole analysis of the advantage was therefore based on an incorrect reference system (paras 49 and 50).

The appeal nevertheless failed, because the operative part was right on other grounds (paras 51 and 52). The Commission had applied the principle as if it were recognised in EU law (para. 53). And Article 164(3) was not enough:

However, as is clear from paragraphs 96 and 104 of the judgment of 8 November 2022, Fiat Chrysler Finance Europe v Commission …, only the incorporation of that principle as such into national law, which as a minimum requires that that law refer explicitly to that principle, would permit the Commission to apply it in the determination of the existence of a selective advantage within the meaning of Article 107(1) TFEU.

The Commission itself had recognised that only since 1 January 2017 had a new article of the LIR “explicitly formalise[d] the application of the arm’s length principle”, after the ruling and its extension, so it could not apply the principle retroactively (para. 55). Applying the Guidelines without showing that Luxembourg law had adopted them breached the rule in Fiat, para. 96 (para. 56). By substitution of grounds the appeal was dismissed; the Commission was ordered to bear its own costs and those of Luxembourg and Amazon, and Ireland bore its own (paras 59 to 63).

A control premium on an intra-group share purchase: nos 43665 and 47391C (tax year 2014)

Facts. Company (AB), a Luxembourg member of the Portuguese group (CD), bought on 23 January 2014 shares in a listed Portuguese company, (MN), from four related companies, (EF), (GH), (IJ) and (KL), and so became its majority shareholder. After a public offer of 12 February 2014, amendments of 19 March 2014 reduced the price per share, and following a capital increase subscribed by the public (AB) held 51% of (MN). On 15 October 2014 it sold the 51% to (OP), a Portuguese subsidiary of a Chinese group, and booked a gain (Cour administrative, 21 September 2023, no. 47391C, pp. 2 to 3). It asked the ACD for an advance decision recognising a hidden contribution on the purchase, on the ground that the shares were worth more than it paid; the request was refused on 5 October 2015 by reference to Article 23(3), under which assets may not be valued above their acquisition price. Its 2014 return nonetheless showed a tax balance sheet with a “fiscal reserve” wiping out the gain and a loss of €29,674,473.10 (pp. 3 and 5). On review, the ACD held that the price paid, equal to the price that the public paid without a control premium, “reflects the arm’s length principle”, rejected the tax balance sheet and taxed the gain, which did not qualify for the exemption under the Grand-Ducal Regulation of 21 December 2001 because the shares had been held for less than 12 months (pp. 3 and 10).

The director. The director rejected the claim on 17 July 2019. He noted that the taxpayer relied on Articles 56 and 56bis, but that Article 56 had been amended only from 1 January 2015 and Article 56bis applied only from 1 January 2017 (pp. 6 to 7). He found the taxpayer’s figures unreliable: its study gave a range for the control premium of 10.06% to 72.94% with a median of 33.68%, an e-mail of 11 September 2018 gave an interquartile range of 20.86% to 50.90%, and the return used 54.37% (pp. 7 to 8). The group had controlled (MN) before the transfer, and no premium had been charged on the resale to a third party (pp. 9 to 10).

The Tribunal administratif. The taxpayer argued that the arm’s length principle was already codified in Article 164(3) and that Luxembourg, a founding member of the OECD, included in all its tax treaties an article allowing profits to be adjusted where the principle was not respected (Tribunal administratif, 22 March 2022, no. 43665, p. 12). (Its judgment uses other pseudonyms: (A) for the taxpayer, (F) for the target and (G) for the buyer.) The Tribunal said that the principle in Article 9 of the OECD Model “is meanwhile enshrined, from the 2015 tax year, through Article 56 LIR, and from the 2017 tax year, through Article 56bis LIR, but not yet in force at the time of the tax year in dispute in the present case” (our translation), and then applied it all the same: an intra-group transaction must correspond to one that independent enterprises would have made and accepted under comparable conditions (p. 15). The legal frame was the hidden contribution under Article 18(1), Article 42(1) and Article 43(1). Because the taxpayer wanted to reduce its profit, the burden was on it (p. 16). It had not shown that a premium had to be paid in all circumstances or that its absence was motivated solely by the group relationship; it merely referred to two studies of 71 and 24 pages in English “without any commentary” (pp. 16 to 17). The resale contract showed no premium either. The studies had been commissioned by the taxpayer, one from the adviser who had represented it before the ACD, their results diverged, and the 54.37% fell outside the ranges in the Portuguese study and in the e-mail of 11 September 2018 (pp. 17 to 18). The action was dismissed with costs (p. 18).

The Cour administrative. On appeal (AB) argued that an acquirer of a controlling block from third parties would necessarily have paid a premium, that the premium is implicit in sale contracts, that the financial press had reported a premium of 31% on the resale, and that under the OECD principles any point in the range is at arm’s length (pp. 11 to 12). The Court confirmed that the burden lay on the taxpayer under Article 59 (p. 13). It accepted that the concept of a control premium exists, citing the French tax administration’s guide of November 2006 on business valuation and a judgment of the French Cour de cassation of 3 February 2015 (no. 13-25.306), but held that the premium is not automatic and must correspond to concrete advantages that the majority position brings to the buyer (p. 14). The taxpayer’s own arm’s length argument then decided the case against it:

Indeed, as the appellant itself stated in its reply, under the arm’s length principle the acquisitions of the shares in company (MN) that it made from companies (EF), (GH), (IJ) and (KL) must be analysed as transactions between independent enterprises … These four transactions must therefore be analysed as transactions carried out with companies having no link between them and selling their respective minority interests in company (MN) separately, and not as a block as the appellant claims.

None of the four sellers could have conferred control on its own; the taxpayer had bought four minority stakes, not a majority stake. The sellers had therefore made no implied hidden contribution equal to a control premium; the contracts fixed the price at the stock-market price after the offer and stipulated no premium, and the studies valued a premium without proving that one should apply (p. 15). The appeal was dismissed and the appellant ordered to pay the costs (p. 15).

A guarantee behind a financing branch: no. 48905 (tax years 2012 to 2015)

Facts. A Belgian group company (BelCo) set up a Luxembourg branch in 2007 for intra-group financing. The branch obtained two rulings: the first on 30 May 2007 and the second on 14 January 2014, on a request of 29 October 2012, effective from 1 January 2012. The second ruling allowed the branch a notional interest deduction on more than 99% of its interest income, because under a letter of 7 March 2012 BelCo bore the credit risk; the branch was taxed on a residual arm’s length margin (Tribunal administratif, 18 March 2026, no. 48905, pp. 12 to 13). On 17 December 2019 the Belgian authorities sent the ACD information under Directive 2011/16/EU and Article 26 of the Belgium–Luxembourg tax treaty: in Belgium, BelCo had produced a second letter, dated 8 March 2012, by which company (AA), a Luxembourg company described as the group’s main holding company, undertook to cover the credit risk on the branch’s loans; the Belgian authorities concluded that the loans and their income were attributable to (AA). According to the revision report, the letter itself was first communicated to the ACD only on 21 January 2022, during the audit (pp. 8 and 14). The ACD’s revision service concluded that (AA) concentrated the significant functions, risks and decision-making of the financing activity and added to its profit an amount equal to the branch’s notional interest deductions (pp. 17 to 20). Corrective assessments for 2012 to 2017 followed on 10 August 2022.

The director. On 16 February 2023 the director declared the claims for 2016 to 2018 inadmissible, because (AA) had been part of a tax unity under Article 164bis since 2016, with its own tax fixed at nil, and no 2018 assessment existed; he confirmed 2012 to 2015 (pp. 10 to 12 and 23). He relied on the principle that group companies must act with each other as with third parties, citing Article 9 of the OECD Model and Articles 56, 56bis and 164(3) LIR, together with §§ 5, 6 and 11 StAnpG (p. 22). The branch’s ruling applied to the branch only (pp. 22 to 23).

Which Article 56. The Tribunal quoted the version of Article 56 applicable to 2012 to 2014 and the version applicable to 2015 (pp. 36 to 37). Neither party disputed that Article 56 applied or drew a distinction between the years, so the Tribunal examined all four years together (p. 37). On the burden of proof it held that the same approach applies under each text: the parliamentary commentary on the old Article 56 allows the administration to presume an undue reduction of profit where the circumstances make it probable; the same is settled under Article 164(3); and the new Article 56 is “entirely devoted to the arm’s length principle”, so the same principles transfer to it (pp. 37 to 38). The State must therefore show a bundle of indications (faisceau d’indices) that make non-compliance probable; only then does the burden pass to the taxpayer (p. 38).

The functions. The Tribunal accepted the general approach: if the functions, risks, assets and decision-making on which an arm’s length remuneration was based are not in fact in the first entity, the administration may look for the entity where they are concentrated and identify it by indications only; and the absence of any actual payment of notional interest does not by itself mean that no tax is due anywhere in the structure (p. 39). But the second ruling, which was not in dispute, had validated the taxation of the structure “in the light of a singular understanding of the arm’s length principle” for 2012 to 2015 (p. 40). A foreign tax decision is a fact, not a rule binding on the ACD:

In proceeding in this way, the State party in reality confines itself to adopting the conclusions of a foreign administration, without verifying in concrete terms, in particular, whether and to what extent, under Luxembourg tax law, (i) the same significance of the functions should be accepted, (ii) the recognition of the notional debt could affect the functional profiles and the assets of the entities involved, (iii) the functions in question should influence the remuneration of those entities and thus, more generally, (iv) there is not in reality a disparity between the applicable Luxembourg and Belgian provisions, or in the way they are applied.

The remaining indications, that one person, Mr (A), sat on the management bodies of several Luxembourg entities and that (AA) had signed the counter-guarantee, did not show that functions other than credit risk had moved to (AA) (pp. 40 to 41). The full adjustment failed.

The guarantee. The State had, however, shown that (AA) bore a very significant part of the credit risk, had the financial capacity to do so, and received nothing for it. The taxpayer’s own transfer pricing report said that “a third party would be willing to pay for such a benefit and a guarantee fee should therefore be charge[d]”; its arguments that the guarantee was a shareholder cost and that such fees were not customary in those years failed (p. 41). The branch’s ruling did not protect (AA): §§ 29a and 29b AO were not in force for those years, so the ruling’s effect depended on legitimate expectations, it concerned the branch only and it did not mention the counter-guarantee (p. 42). The Tribunal also refused to let the outcome depend on a State aid case concerning another group, which the taxpayer had not shown to be comparable: it is not for the court to subordinate its judgment to the hypothetical impact it could have in a State aid case opened by the Commission (p. 36).

Prescription and outcome. The counter-guarantee was a new fact under § 222(1), no. 1, AO, since the ACD learned of it, through the Belgian information of 17 December 2019, only after the original assessments, and the returns were incomplete, so the ten-year limitation period under Article 10 of the Law of 27 November 1933 applied to 2012 to 2015 (pp. 33 to 34 and 43). The Tribunal reformed the decision: the increases were justified only to the extent of the amount remunerating the guarantor functions and risks assumed by (AA) under the counter-guarantee. Because the court is not a “taxateur”, it did not fix the amount and referred the case back to the director; it declined jurisdiction to order the ACD to annul the assessments, refused a procedural indemnity and split the costs equally (pp. 24 and 43 to 44).

An interest-free shareholder loan and notional interest: nos 44902 and 48125C (tax year 2016)

Facts. Company (AB), formed on 15 April 2016 in a US group, invested mainly in debt instruments. Its sole shareholder granted it an interest-free loan (IFL) documented on 19 December 2016 with effect from 29 April 2016, funded the same day by a profit participating loan from a Cayman Islands company of the group (Cour administrative, 23 November 2023, no. 48125C, p. 4). In its 2016 return (AB) deducted a “transfer pricing adjustment” for notional interest on the IFL, relying on Articles 56 and 56bis, and its shareholder reported the same amount as income (pp. 4 and 18 to 19). The ACD refused the deduction. The director, on 23 January 2020, requalified the IFL as a hidden capital contribution: the limited recourse clause, the lack of guarantees, the lender’s right to convert the loan into shares, the absence of interest, the seven-month gap before signature and the absence of any notional interest for 2017 all pointed to equity; the transfer pricing study, based on the transactional net margin method with a 9.90% mark-up on operating costs, was rejected because the taxpayer had not shown why the comparable uncontrolled price method, preferred by paragraph 2.3 of the OECD Guidelines, could not be used; and the claimed neutral effect “on a consolidated basis” was “fallacious”, because the shareholder paid almost no tax on the notional income. The director also noted that a request for a tax unity under Article 164bis had been made only on 11 May 2017 and granted from 2017 (pp. 4 to 10).

The Tribunal administratif. On 23 September 2022 the Tribunal dismissed the action (Tribunal administratif, no. 44902). It rejected the argument that the ACD had been inconsistent because, by an advance decision of 11 November 2009, it had accepted notional interest on an interest-free loan granted to another company (Société 3 SARL) by its parent: an earlier position of the ACD on another taxpayer could not limit the court, and the selectivity of that treatment, under investigation by the Commission, had not yet been decided (pp. 21 to 22). Applying the indications listed in the parliamentary history and in Cour administrative, 26 July 2017, no. 38357C, it held the IFL to be a hidden capital contribution: the repayment obligation was emptied of meaning by the limited recourse clause; the lender could require shares to be issued; the combination of the conversion and assignment clauses produced the effect of a stapling clause; there was no interest and no protection against default; the debt to equity ratio of 90/10 reflected the taxpayer’s own drawing choice and capital at the end of the year rather than on the date of the advance; and the late documentation suggested “a late legal dressing” to make up for the missing tax unity for 2016 (pp. 23 to 25). Whether the notional interest was at arm’s length was therefore superfluous (p. 25).

The Cour administrative. The Court reversed. It recalled the parliamentary history and its own case law (nos 38357C and 46131C) and held that the analysis must be overall, applying the primacy of economic reality over legal appearance, with each clause tested against its actual performance (p. 15). It then weighed the indications one by one (pp. 16 to 18):

• the date of signature was irrelevant: what counts is when the funds were made available, and a loan needs less formality than a capital increase;
• the funds were not used for long-term assets, and the first judges were wrong to disregard that criterion;
• the debt to equity ratio had to be judged by the rules in force in April 2016, that is Circular 164/2 with its 1% or €2 million cap, not by the case-by-case approach of Circular 56/1 – 56bis/1 of 27 December 2016, and by the amount actually drawn, not the facility limit;
• the dividend paid to the shareholder was paid because of its shares, not under the loan, and the loan gave no profit participation, liquidation surplus or voting rights;
• the loan gave the borrower no unilateral right to convert it into capital, although clause 9 let the lender require conversion at its discretion; repayment in kind needed the lender’s consent and would use underlying assets, not the borrower’s own shares; and there was no stapling clause, the lender being free to assign the loan;
• a maturity of eight years (or ten in another clause) did not show an investor’s intention;
• the limited recourse clause transferred the investment risk to the lender, which affects the remuneration but does not cancel the repayment obligation, and such clauses are common in structured and project finance;
• the absence of interest and the absence of guarantees were indications of equity, but subordination to bank debt is usual for intra-group loans.

The decisive point was performance: only a small part of the facility was drawn, and the loan was repaid on 31 December 2018, long before maturity. The IFL was debt (p. 18). On the arm’s length question the Court went no further than the pleadings:

The Court notes that the appellant relies on the principle of such notional interest on account of the IFL and on the amount it adopted on that basis, on the basis of the above-mentioned report by limited liability company (CD), and that the State has raised no plea on appeal seeking to have rejected first the principle of such interest or then the arm’s length character of the amount actually adopted by the appellant. Since the Court is limited by the pleas before it, it cannot itself review the principle of the notional interest mechanism and the arm’s length character of the notional rate of interest declared by the appellant.

The director’s decision was reformed so that the notional interest adjustment was deductible as an operating expense for 2016, the case was referred back to the director for execution, and the costs of both instances were charged to the State (p. 19). The appellant had also compared the IFL with the loan in Huhtamäki v Commission (T-134/20), in which, it said, Luxembourg defends the imputation of arm’s length interest on an interest-free loan with a 15-year maturity; the Court did not address that comparison (p. 11).

A loan restructuring and excess bond interest: no. 47100 (tax year 2017)

Facts. Company (AA), held by company (AA1), owned 65% of a French company, (BB), which operated a waste-to-energy plant. It had lent (BB) money on 21 December 2010 at 12% and funded the loan with US dollar bonds issued in 2011 and 2015 to (AA1), whose interest depended on the loan interest and other income including currency gains. Its transfer pricing analysis set an arm’s length financing margin of 0.147% of the financing volume, an arm’s length range for the loan of 7.97% to 14.2% and a rate on the bonds of 11.85% (Tribunal administratif, 6 June 2025, no. 47100, pp. 13 to 16). (BB) ran into serious difficulties. Under a term sheet of 11 September 2017 and a settlement agreement of 29 March 2018, (AA) accepted, as interest for the period from 1 January 2017 to 29 March 2018, only the amount accrued at 12% for part of 2017 (to 15 October 2017 according to the claim, to September 2017 according to the Tribunal), and granted a new facility at 6% from 29 March 2018; part of the debt was capitalised, and (AA) received a stake of about 19% in another company of the industrial group (pp. 3 and 20 to 21). (BB) stopped payments on 17 December 2018 (p. 27). The ACD added to (AA)’s 2017 profit the interest missing on the loan at 12% and the interest paid on the bonds above 11.85%, describing the corrections, in an inverted form, as a “taxable hidden contribution” and a “non-deductible hidden distribution” (p. 12).

Procedure. The director did not decide the claim within six months, so (AA) appealed directly against the assessments (p. 7). Its complaint that the § 205(3) AO letter was unintelligible failed: the inverted amounts and labels came from the taxpayer’s own documents, an official had explained the error by telephone before the assessments, and the case differed from Cour administrative, 14 July 2015, no. 35428C, where technical terms had been used without further explanation (pp. 12 to 15).

The merits. The Tribunal noted that the State did not dispute the data in the taxpayer’s transfer pricing analysis, so the 0.147% margin and the 12% rate were a priori at arm’s length (p. 23). It stated that the arm’s length principle in Article 9 of the OECD Model “is meanwhile enshrined in national legislation, from the 2015 tax year, through Article 56 LIR, and from the 2017 tax year, through Article 56bis LIR”, citing its judgment of 30 March 2023, no. 47414 (p. 24).

On the loan, the reduction of interest was a debt remission by a parent to its subsidiary. Since the administration was increasing the taxable base, it had to prove the facts, but the Tribunal found the proof made (pp. 25 to 26). The 6% rate was half of the 12% rate that lay within the taxpayer’s own arm’s length range and below its floor of 7.97%; a rate prescribed by a transfer pricing analysis is “by nature” one practised between independent enterprises, so the reduction was a priori motivated by the shareholding (p. 26). The subsidiary’s real difficulties did not change this; they confirmed that the parent had given it funds to avoid insolvency (p. 27). The stake in the other company might be a counterpart, but nothing showed that it was adequate (p. 27). The Tribunal put the gap squarely on the taxpayer’s documentation:

In the absence of a separate transfer pricing analysis submitted by the applicant company, taking account of the new factual circumstances, in order to determine a new range of rates complying with the arm’s length principle, the tax office and, subsequently, the tribunal have been made unable to verify that the new rate of 6% would have been the one agreed with a third-party debtor operating under free market conditions.

The participation of a third-party shareholder of (BB) in the settlement did not remove the intra-group character of the financing under Article 56 (p. 28).

On the bonds, the Tribunal applied Article 164(3). (AA1), as sole shareholder, was an associate; (AA) had paid interest above the amount due at 11.85% under its own analysis, which reduced its net assets; that bundle of indications shifted the burden to the taxpayer, who could not explain why it had paid more than the bond contracts themselves required. Its argument that the ACD had used market rather than nominal values failed because the figures came from its own accounts (pp. 29 to 31). The action was dismissed; the requests for a procedural indemnity of €2,000 and for suspensive effect pending appeal under Article 35 of the Law of 21 June 1999 were refused; the taxpayer bore the costs (pp. 32 to 33).

How the judgments fit together

Two different questions. The CJEU did not decide whether the Fiat and Amazon prices were at arm’s length. It decided what the Commission must compare a ruling with: the Luxembourg rules as they stood, interpreted and applied by Luxembourg, not a principle drawn from Article 107(1) TFEU or from the OECD Guidelines (Fiat, paras 74, 91 and 96; Amazon, paras 42 and 44). The Luxembourg courts deal with the other side of the same rules: how far the ACD may correct a group company’s profit, and who must prove what.

Article 164(3) at EU and national level. In Amazon the Court held that Article 164(3), as interpreted by the ACD, did not incorporate the arm’s length principle “as such”, because the law did not refer to it explicitly (para. 54). The Luxembourg courts see Article 164(3) as one of the places where the principle is anchored and apply the same probability-based burden of proof under it as under both versions of Article 56 (no. 48905, pp. 37 to 38; no. 47100, pp. 29 to 30). The statements are not contradictory: the CJEU set a threshold for using a principle as the reference system for State aid, while the national courts apply domestic rules on correcting profits. But for 2012 to 2014 the ACD and the Tribunal corrected intra-group prices under the old Article 56, with a burden of proof also drawn from Article 164(3), rules that, according to Amazon, para. 55, did not yet explicitly formalise the principle.

Dates. The CJEU, following recital 243 of the Amazon decision, dates the explicit formalisation of the principle to 1 January 2017 (Amazon, para. 55), and Advocate General Pikamäe refers to new Articles 56 and 56a from the same date (footnote 7). The Luxembourg courts and the director date the arm’s length wording of Article 56 to 1 January 2015 and Article 56bis to 1 January 2017 (nos 43665, p. 15; 47391C, p. 6; 47100, p. 24; 48905, pp. 36 to 37). For Amazon the difference does not matter, since all its years ended in 2014. The Fiat ruling covered 2015 and 2016 as well (para. 10), but the judgment does not discuss the 2015 version of Article 56, and whether that wording would meet the “explicit reference” test in Amazon, para. 54, is not addressed in the sources.

Manifest error and margins. Fiat, para. 122, requires the Commission to show that national parameters are “manifestly inconsistent” with non-discriminatory taxation and “systematically” undervalue transfer prices. Advocate General Kokott would have gone further and limited State aid review of individual rulings to manifest errors (points 94 and 96); the Court in Amazon did not need to decide that point. Advocate General Pikamäe accepted a margin of appreciation for national authorities, but not a “broad” one (point 118). Neither judgment says how much a ruling may deviate from Luxembourg’s own rules before it confers an advantage.

The ruling as a fact in domestic proceedings. In no. 48905 the branch’s ruling, requested according to the taxpayer to conform with Circular 164/2, the circular also applied in the Fiat ruling (no. 48905, p. 25), had validated what the Tribunal called a “singular understanding of the arm’s length principle” (p. 40). The Tribunal did not reopen it, but held that it protected only the branch and did not cover a counter-guarantee it did not mention (p. 42). The administrative courts also refused, twice, to let a Commission State aid investigation into another taxpayer influence a domestic assessment (no. 44902, pp. 21 to 22; no. 48905, p. 36).

The taxpayer’s own study. In three of the four cases the decisive evidence was the taxpayer’s own transfer pricing work. In no. 47100 the taxpayer’s range and rates became the yardstick for the corrections; in no. 48905 its report confirmed that a guarantee fee was due; in no. 43665 its divergent studies undermined its claim. In no. 48125C the study was not tested at all, because the State did not plead against it on appeal.

Arm’s length and the characterisation of a loan. No. 48125C shows the order of questions: first, whether a shareholder advance is debt or equity under the overall analysis inherited from the parliamentary history; only if it is debt does the arm’s length interest question arise. The Tribunal administratif stopped at the first question; the Cour administrative answered it the other way and, on the second, held itself bound by the absence of a plea. The question whether Luxembourg law requires or permits a deduction of notional arm’s length interest on an interest-free loan was therefore left open (p. 19).

What it means in practice

• Know which text applies. For years up to 2014, the adjustment rules were the old Article 56 and Article 164(3); for 2015 and 2016, the new Article 56; from 2017, Articles 56 and 56bis. The Tribunal applied the same burden of proof under the old and the new Article 56 and under Article 164(3) (no. 48905, pp. 37 to 38).
• Groups are tested company by company. A group that argues for separate-entity treatment must accept its consequences: in no. 47391C four intra-group purchases were treated as four purchases of minority stakes, with no control premium (pp. 14 to 15).
• Keep the transfer pricing study current. When terms change, such as a rate cut in a restructuring, a new analysis for the new circumstances is needed. Without one, the old range becomes the benchmark (no. 47100, p. 28).
• Follow your own contracts and analysis. Paying more interest than the analysis or the bond terms require invites a hidden distribution finding under Article 164(3) (no. 47100, pp. 30 to 31).
• Price guarantees. A group company that bears credit risk for another entity should be remunerated; in no. 48905 the risk had never materialised (revision report, p. 19), yet a guarantee fee was due and the shareholder cost argument failed (p. 41).
• Rulings cover their addressee and the facts disclosed. A ruling for a branch did not protect the company that guaranteed the branch’s risk, and a document not disclosed to the ACD was a new fact opening the ten-year limitation period (no. 48905, pp. 34, 42 and 43).
• Shareholder loans. Document loans promptly, draw and repay as agreed, and keep evidence of how the funds were used; actual performance was decisive in no. 48125C (p. 18). The 1% or €2 million cap of Circular 164/2 was the test for 2016; for later years Circular 56/1 – 56bis/1 requires the capital at risk to be set case by case (pp. 16 to 17).
• State aid arguments carry little weight in domestic tax litigation. The courts declined to let a State aid case concerning another group shape a domestic assessment (nos 44902 and 48905).
• For the Commission’s side. After Fiat and Amazon, a State aid challenge to a Luxembourg ruling must start from Luxembourg’s own transfer pricing rules and show that the parameters they lay down are manifestly inconsistent with non-discriminatory taxation (Fiat, para. 122). Rulings and practice should therefore be documented by reference to the Luxembourg rules in force for the years they cover.

Status

Both State aid decisions are annulled: the Fiat decision by the Court of Justice itself (8 November 2022, operative part, point 3), and the Amazon decision by the General Court, whose judgment the Court of Justice upheld on substituted grounds (14 December 2023).

In the Luxembourg courts, no. 47391C dismissed the appeal and confirmed no. 43665. No. 48125C reformed the Tribunal’s judgment and referred the case back to the director for execution. No. 47100 (6 June 2025) and no. 48905 (18 March 2026) are judgments of the Tribunal administratif; no appeal judgment in either case (nos 47100C or 48905C) is among the sources. In no. 48905 the case went back to the director to fix the guarantee remuneration.

The law has moved on in ways that our current text shows: Article 56 and Article 56bis now set out the arm’s length principle and the comparability analysis in the statute, so the explicit statutory basis that the CJEU found missing for the Amazon years exists for tax years from 2017. How the CJEU’s test in Fiat, para. 122, would apply to rulings under those provisions has not been decided in the sources reviewed here.

Provisions discussed

• Income Tax Law: Art. 18, Art. 42, Art. 43, Art. 56, Art. 56bis, Art. 164

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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.