In a recent court case1 about transfer pricing for
interest rates on intra-group loans, the court ruled in favor of
the Luxembourg Tax Authorities (LTA). The LTA had challenged the
12% interest rate payouts of the Luxembourg company (LuxCo), which
were considered to deviate from the arm's length principle. The
excessive interest was requalified as hidden dividend distribution
on which withholding tax was assessed. This case law creates an
additional incentive for Luxembourg taxpayers to prepare
appropriate transfer pricing documentation to set the arm's
length price of all their intra-group transactions prior to
entering into the transaction.
About the case
The LuxCo acquired real estate in the south of France in 2008.
The acquisition price of EUR 26 million was financed by a bank loan
of EUR 20 million and a shareholder loan (SHL) of EUR 6 million. An
interest rate of 12% was set on the SHL. There is no discussion on
the comparison between the bank loan and the
