BDO Transfer Pricing News

The Luxembourg Administrative Tribunal’s 18 March 2026 decision (Judgment No. 48905) reinforces the importance of rigorous analysis of intragroup financial arrangements, particularly where explicit guarantees are present. The Tribunal examined a financing structure involving a Belgian company, its Luxembourg branch and a Luxembourg holding company, focusing on a letter in which the Luxembourg holding company agreed to bear the credit risk associated with the branch’s financing activities.

The Tribunal ultimately rejected the tax authorities’ attempt to reallocate the full financing return to the Luxembourg holding company. Instead, it limited the adjustment to an arm’s length remuneration for the guarantee-type credit support, emphasising two core principles:

• An explicit guarantee that confers a material benefit requires arm’s length remuneration; and
• Assuming credit risk under a counter-guarantee is not equivalent to performing or controlling the broader intragroup financing function.

Accordingly, the Tribunal held that the Luxembourg holding company should be remunerated only for its guarantor functions, unless the tax authorities could demonstrate that it also performed and controlled the economically significant functions of the financing activity.

Facts of the Case

The structure under review had been shaped by earlier Luxembourg ruling practice. The Luxembourg branch of the Belgian company operated as a limited-risk finance platform under advance tax rulings obtained in 2007 and 2014, which allowed the branch to apply a substantial notional interest deduction to offset the interest income generated, premised on the understanding that the branch bore only limited credit risk, with the main credit risk borne outside the branch (i.e., by the Belgian company).

A dispute arose when the Belgian tax authorities obtained and shared with the Luxembourg tax authorities a previously undisclosed letter dated 8 March 2012 in which the Luxembourg holding company agreed to assume the credit risk associated with the branch’s financing activities. This document had not been disclosed to the Luxembourg authorities during the second ruling process.

The Luxembourg tax authorities viewed the counter-guarantee as a decisive “new fact” and took the position that the Luxembourg holding company should be attributed the financing income previously neutralised at the branch level via the notional interest-based adjustment. In effect, the tax authorities sought to move beyond a guarantee-fee adjustment and reallocate the full financing return to the holding company. The Luxembourg holding company challenged the assessment, arguing:

• The reassessment was time-barred by the Luxembourg five-year statute of limitations;
• The counter-guarantee was not a new fact;
• It lacked the substance to managed financing activities; and
• Reversing the notional interest deduction violated the advance ruling and the principle of legitimate expectations.

Tribunal’s findings

The Tribunal found partially for the Luxembourg holding company and partially for the tax authorities.
 

• The counter-guarantee was a new fact: The Tribunal held that the 2012 counter-guarantee letter obtained through the Belgian exchange of information was not previously available to the Luxembourg tax authorities and constituted a newly discovered element that justified re-opening the years at issue.
• The 10-year statute of limitations applied: The Tribunal noted that Luxembourg’s normal five-year statute of limitations period extends to 10 years where additional tax is due because a tax return was incomplete or inaccurate, regardless of fraudulent intent. Because the undisclosed counter-guarantee resulted in an incomplete or inaccurate tax position, the 10-year period applied and the reassessments were timely.
• The tax authorities failed to show the holding company performed the full financing function: The Tribunal found no evidence that the Luxembourg holding company performed or controlled the economically significant functions, assets, risks and decision-making powers associated with the intragroup financing activity. Crucially, the Tribunal emphasised that assuming certain credit risk does not equate to performing the broader financing function. The counter-guarantee justified an adjustment only to the extent it reflected a guarantee-type role.
• The Luxembourg holding company did assume a guarantee function and should be remunerated: The Tribunal accepted that the holding company bore a significant credit risk under the 8 March 2012 counter-guarantee and had the financial capacity to do so. Because it received no remuneration, the arm's length principle was breached. The Tribunal therefore held that the Luxembourg company should have received an arm’s length guarantee fee, no more no less.
• The branch ruling did not automatically protect the holding company: The Tribunal rejected the holding company’s reliance on legitimate expectations arising from the branch ruling. The ruling applied only to the branch, and it did not cover the Luxembourg company or the undisclosed counter-guarantee. As a result, the Luxembourg holding company could not rely on the branch ruling to avoid an adjustment for its guarantee function, and the Tribunal upheld the adjustments for 2012-2015.

Key Takeaways and Recommendations

• Explicit support arrangements (such as internal support letters, comfort arrangements, collateral agreements and guarantees) should be identified, documented and evaluated for transfer pricing implications. Where they shift or reinforce economically relevant risk or confer a measurable benefit, arm’s length remuneration may be required.
• Risk-bearing alone does not justify full residual returns. Luxembourg continues to apply a granular, entity-level analysis focused on functions performed, assets used and risks controlled.
• Undisclosed support arrangements that result in an incomplete or inaccurate tax position may allow the tax authorities to reopen prior years under the extended 10-year statute of limitations.
• For each explicit support mechanism, taxpayers should maintain documentation explaining:
  • Whether the arrangement confers a measurable benefit for another group entity;
  • Who controls the relevant decision-making; and
  • Whether an arm’s length guarantee fee or similar remuneration is required.
• Cross-jurisdictional consistency is essential. Support letters and guarantees should be reconciled across all local files, rulings and transfer pricing documentation

Daniel Ortega
Gerdy Roose
BDO in Luxembourg