In 2011, a Luxembourg company (Company A) granted a profit participating loan (Loan) to its Belgian subsidiary (Company B), which held debt securities issued by another entity (the Securities). On January 1, 2018, Company B repaid the outstanding loan in kind by transferring the Securities to Company A at their nominal value.  

On the same day, Company A transferred the Securities to another group entity (Company G), at their market value.  

Company A claimed that no taxable capital gain should be accounted on this last transfer for tax purposes. They argued that the transfer from Company B to Company A should be treated as a hidden dividend distribution made by Company B, exempt in the hands of Company A as the recipient.  

The tax authorities claimed the entire 2018 operation constituted an abuse of law, aiming to circumvent the special anti-abuse rules enacted in the Parent-Subsidiary Directive enforced in Luxembourg law as of 1 January 2016.   

The fact, for Company B, of repaying the Loan in kind by assigning the Securities at their nominal value and thus renouncing the possibility of realizing a capital gain, instead of selling the Securities directly at their market value to Company G and using the proceeds of this transfer to the repayment of the Loan, cannot be justified from a commercial perspective. It was furthermore admitted that a third party, not bound by a shareholding relationship, would not have agreed to transfer the Securities at their nominal value, which was lower than their market value. The Tribunal confirmed that this constituted an abuse of law. 

For more information on the decision of the Administrative Tribunal, click here. 

If you require additional information, please don’t hesitate to contact our tax team.