The Luxembourg Administrative Court has ruled that an intra-group debt restructuring must be assessed based on the economic circumstances and realistic alternatives available when the restructuring occurs, while contractual interest remains deductible on the nominal amount of debt despite an accounting or market-value reduction.
The Luxembourg Administrative Court (Cour administrative) issued its decision in case 53194C on 22 July 2026, concerning the application of the arm’s length principle to an intra-group debt restructuring and the deductibility of interest expenses.
The case involved a Luxembourg company that held a 65% interest in a French company and had granted it a loan carrying a 12% interest rate. The loan was financed through bonds issued to the Luxembourg parent company.
Following a deterioration in the French company’s financial position, the parties entered into a broader restructuring involving the borrower, the Luxembourg lender, the minority shareholder and other stakeholders. The restructuring included a partial waiver of accrued interest, a conversion of part of the debt into equity, a reduction of the interest rate to 6%, additional guarantees and a reorganisation that reduced the Luxembourg company’s shareholding to 20% in a larger company.
The Luxembourg tax authorities had treated the waived interest as a hidden contribution to the French subsidiary. They also denied the deduction of part of the interest expense on the bonds issued to the parent company.
Transfer Pricing assessment must reflect current circumstances
The Court held that the arm’s length character of the restructuring must be assessed according to the economic circumstances existing when the restructuring took place and the realistic options available to the parties at that time.
The Court referred to Articles 56 and 56bis of the Luxembourg Income Tax Law and the OECD Transfer Pricing Guidelines. It found that a transfer pricing study supporting the original 12% interest rate could not by itself provide the appropriate benchmark for the later restructuring because it reflected the circumstances prevailing when the loan was granted in 2010.
The Court found that the French borrower was experiencing serious financial difficulties. In those circumstances, maintaining the original financing terms could have increased the risk of default or insolvency and resulted in a lower recovery for the lender.
The Court therefore accepted that an independent lender could rationally reduce or waive part of its claim where doing so offered a better economic outcome than the realistically available alternatives, including default or insolvency.
Restructuring assessed as a whole
The Court also rejected an isolated assessment of the interest waiver. It considered the restructuring as a broader commercial arrangement in which several parties made concessions and provided additional support.
The involvement of the unrelated minority shareholder and other third parties was considered relevant evidence of market behaviour. The additional guarantees, debt-to-equity conversion and wider restructuring arrangements also supported the commercial rationale for the concessions made by the Luxembourg company.
On this basis, the Court concluded that the partial interest waiver was consistent with the arm’s length principle and should not be characterised as a hidden contribution to the subsidiary.
The ruling indicates that each element of an intra-group restructuring should be considered in the context of economically linked arrangements, while taking into account the realistic options available to each party.
Interest remains deductible on nominal debt
The second transfer pricing and tax issue concerned interest paid by the Luxembourg company on bonds issued to its parent company.
The Luxembourg tax authorities argued that deductible interest should be calculated using the reduced market value of the bonds rather than their nominal value. The bonds had been subject to an accounting write-down or depreciation.
The Court rejected this approach. Referring to Article 23 of the Luxembourg Income Tax Law, it confirmed that liabilities are generally valued at their nominal amount, unless circumstances such as an actual debt waiver justify a reduction.
The Court held that an accounting impairment or decrease in the market value of a debt does not change the legal and contractual amount owed by the debtor. Accordingly, contractual interest continues to accrue on the principal amount of the debt rather than on its depreciated market value.
The disputed interest expense therefore remained fully deductible.
Implications for transfer pricing
The decision confirms that transfer pricing analyses for distressed debt restructurings should reflect the economic reality at the time of the restructuring rather than rely mechanically on the terms and analysis used when the original financing was established.
It also demonstrates that an interest reduction or waiver can be arm’s length where an independent lender would reasonably accept the concession to preserve value or obtain a better outcome than under a default or insolvency scenario.
The Court’s consideration of the restructuring as a whole also highlights the relevance of unrelated third-party involvement, reciprocal concessions and additional guarantees when determining whether an arrangement reflects arm’s length behaviour.
For intra-group financing, the judgment further confirms that the contractual principal amount remains relevant for interest deductions despite an accounting or market-value reduction in the debt, unless the legal obligation has been reduced through circumstances such as an actual debt release.
