Clifford Chance

Luxembourg Administrative Court Reclassifies Interest-Free Loans as Equity for Tax Purposes

26 May 2025

On 17 April 2025, the Luxembourg Administrative Court rendered a significant decision concerning the reclassification of a financial instrument—specifically, an interest-free loan—into equity for tax purposes (case n° 50602C).

The case involved a Luxembourg limited liability company ("LuxCo") that acquired in 2015 participations in two foreign companies, funded by two interest-free loans from its indirect shareholder. LuxCo treated these loans as debt instruments from a tax and accounting perspective. Additionally, LuxCo established a branch in Malaysia, to which its foreign participations were allocated. LuxCo sought an advance tax agreement from the Luxembourg tax authorities to recognise the existence of a permanent establishment in Malaysia, aiming to exempt its foreign participations allocated to the Malaysian branch from corporate income tax, municipal business tax, and net wealth tax.

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