On 23 September 2022, the Luxembourg lower administrative court, in its judgement n°44902, ruled that an interest free loan granted to a Luxembourg company should qualify as disguised equity for Luxembourg tax purposes and therefore denied the tax deductibility of the notional interest.
To reach this conclusion, the lower court applied the substance over form approach and analysed the legal features of the loan (e.g., subordination to the other (bank) debts, lack of guarantees including a limited recourse clause, contribution or conversion into equity clause, disproportion between capital and on-lent amounts, absence of obligation of repayment if the underlying asset or income derived from such assets are insufficient…).
This decision is in line with the current approach of the Luxembourg tax authorities and the Luxembourg courts which allows the requalification of a financing instrument based on an economic analysis of its legal features.
This case law may be relevant when drafting the terms of financial instrument or taking reporting position in tax returns.
