In 2010, a Luxembourg company granted fixed-interest euro loans to its 65%-owned French subsidiary, funded by USD bonds issued to its sole shareholder. The loans carried a 12% rate while the bonds bore a variable rate linked to the loan returns. In 2018, due to the subsidiary’s financial distress, the company partially waived accrued interest, reduced the rate to 6%, converted part of the debt to equity, and restructured the shareholding. The TP study indicated an arm’s length range of 7.97% to 14.2%, and the applied 6% rate was outside this range.
The tax authorities considered the debt waiver as hidden capital contributions and part of the interest deductions as hidden dividends.
Decision
The Administrative Court upheld the assessment issued by the tax authorities. It found no proof that such a reduction would have been accepted by an independent lender and noted the absence of an updated TP study reflecting the changed circumstances. The court upheld the tax authority’s requalification and rejected arguments that third-party shareholder involvement altered the intragroup nature of the deal.