Key Luxembourg tax decision: non-deductibility of debt linked to exempt immovable property

Background of the Case

On 30 April 2025, the Luxembourg Administrative Tribunal issued a judgment addressing the non-deductibility of debt linked to immovable property exempt under a double tax treaty and its implications for Luxembourg net wealth tax payable by a Luxembourg limited liability company (“Luxembourg SARL”). The key issue was whether a loan used to finance such exempt property could be partly deductible.

The case concerned a Luxembourg SARL in liquidation that owned shares in a Polish entity holding real estate located in Poland. Under Luxembourg tax law, the Polish entity was classified as a transparent entity. As a result, the Luxembourg SARL attributed the property and the associated loan to itself for valuation purposes related to net wealth tax for the years 2013 and 2014.

The taxpayer invoked the double tax treaty between Luxembourg and Poland to exempt the property from Luxembourg net wealth tax. For valuation, it used a historical value from 1941 (as it should be the case for a building located in Luxembourg) rather than the property’s current market value. The taxpayer further sought to deduct the part of the associated loan exceeding the exempt value of the property.

However, the Luxembourg tax authorities disagreed. They denied the deduction of the loan, contending that since the immovable property was exempt from net wealth tax under the treaty, the corresponding loan should also not be deductible. After failing to receive a response from the tax director to their initial appeal, the taxpayer brought the matter before the Administrative Tribunal.

Legal Issue

Can a debt economically linked to immovable property exempt under a tax treaty be deductible for the portion exceeding the exempt value of the property for net wealth tax purposes?

Procedural Observations

The Administrative Tribunal noted that since the SARL was in liquidation, only the liquidator had the legal standing to act on behalf of the company. Accordingly, it confirmed that the case filed by the liquidator was valid.

Findings by the Tribunal

I/ Exclusivity of Taxation in Poland

The Tribunal upheld that under the double tax treaty between Luxembourg and Poland, immovable property located in Poland was exclusively taxable in Poland. This supported the taxpayer's position that the property should be exempt from Luxembourg net wealth tax, but not on the same ground: whereas the taxpayer argued inclusion into the net wealth tax basis and then exemption as per the double tax treaty, the Tribunal concluded to a non-inclusion into the net wealth tax basis.

II/ Treatment of Debts Associated with Exempt Property

Unlike for assets, which the tax treaty excludes expressly from the net wealth tax basis, financing debts are not mentioned. Therefore, they could presumably be taken into account for deduction against a net wealth tax exposure, which is what the taxpayer wanted to argue: for the portion of the debt exceeding the value of the exempt asset, such excess should be deductible (against other assets triggering net wealth tax). However, the Administrative Tribunal relied on §74 of the law of 16 October 1934 concerning the valuation of property and values (Bewertungsgesetz), which states that debts economically linked to assets excluded from taxable wealth are not deductible.

Applying this principle, the Tribunal concluded that as the immovable property was exempt, the entirety of the loan associated with the property was also non-deductible for net wealth tax purposes.

III/ Valuation Method of the Immovable Property

The Tribunal declined to address the taxpayer’s valuation method (the use of the 1941 value rather than the market value), considering it unnecessary to resolve the specific issue of debt deductibility. The valuation dispute, including arguments about EU law conformity, was not relevant to the Tribunal’s decision on the deductibility of the loan.

Although the Tribunal agreed with the taxpayer’s interpretation of the tax treaty’s provisions concerning taxation rights over the property, it ultimately upheld the tax authorities’ decision. The loan economically linked to the exempt immovable property could not be deducted for the portion in excess of the value of the exempt asset for net wealth tax purposes.