Luxembourg Court Rejects 85:15 Debt-to-Equity Rule in Intra-Group Financing

In a landmark ruling issued on 17 April 2025 (Case No. 50.602C), the Luxembourg Higher Administrative Court rejected the long-standing use of the 85:15 debt-to-equity ratio as a binding standard for intra-group financing.

Until now, Luxembourg had applied this ratio as an administrative safe harbour, despite lacking statutory thin capitalisation rules. Debt exceeding the 85% threshold was often requalified as equity for tax purposes.

The Court, however, confirmed that this administrative ratio holds no binding legal value. Instead, companies must evaluate their debt capacity on a case-by-case basis, supported by a comprehensive transfer pricing analysis.

Crucially, the appropriate debt-to-equity structure is the one that independent third parties would have agreed upon under arm’s length conditions, not what is assumed under administrative practice.

Practical tip

Luxembourg companies engaged in intra-group financing should maintain clear documentation justifying their chosen debt-to-equity ratios, evidencing compliance with the arm’s length principle.