Luxembourg vs “Lux PPL SARL”, July 2021, Administrative Tribunal, Case No 43264

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Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company.  The participation in the Irish company was set up in the form of debt (85%) and equity (15%).

The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin.

After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest  charge under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax.

The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the interest charge on the PPL exceeded an arm’s length charge.

Later, Lux PPL SARL received a dividend of EUR 30 million from its participation in the Irish company and at the same time expensed interest on the PPL in its tax return in an amount of EUR 29,630,038.

The tax administration found that the interest charged on the PPL exceeded the arm’s length remuneration. An assessment was issued according to which a portion of the interest expense was denied and instead treated as a hidden dividend subject to the 15% withholding tax.

Lux PPL SARL filed an appeal to the Administrative Tribunal in which they argued that the tax ruling was binding on the tax administration. In regards to interest charge, Lux PPL SARL argued that according to the OECD TPG, if the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle.

Judgement of the Administrative Tribunal

The Tribunal found the appeal of Lux PPL SARL justified and set aside the decision of the tax administration.

According to the Tribunal, the arm’s length interest charge under the PPL could be determined by a comparison with interest on fixed interest loan and any interest charge within the arm’s length range would satisfy the arm’s length principle.

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Lux vs LUXPPL SA July 2021 Case No 43264

TP-Guidelines

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