Leuven court addresses key Transfer Pricing aspects in intra-group loans

On June 6, 2025, the Court of First Instance of Leuven delivered an interesting judgement on the transfer pricing (“TP”) aspects of intra-group financing. The judgement provides valuable insights on credit rating determination, the impact related to subordination, and the use of the modified CUP method in assessing the arm’s length nature of intra-group interest rates. Below, we highlighted some key TP findings and their implications for multinational groups engaged in intercompany financing.

Judgment of the Court of First Instance in Leuven dated June 6, 2025.

Background of the case

The case concerned a Belgian company that entered into an intra-group loan in 2011:

• The intra-group loan, concluded for a ten-year term, was characterized a.o. by a fixed interest rate and a subordination clause.
• The intra-group loan was used to finance equity investments in another group company, and was early repaid in 2016.
  
  

Key facts

• During a tax audit, the Belgian tax administration challenged the arm’s length nature of the interest rate applied to this intra-group loan. The administration argued that — based on a comparable uncontrolled price (“CUP”) — a materially lower rate should have been applied.
  
  
• The Belgian tax administration relied for its position on an unsecured fixed-rate USD bond issued in 2011 by the ultimate parent company of the Belgian company. It is considered that this transaction would be a valid CUP given its broadly similar tenor, issue date and amount.
  
  
• The Belgian tax administration performed a USD–EUR swap to this USD bond to determine a EUR denominated interest rate and further relied on the parent company’s credit rating to determine the spread.
  
  
• The taxpayer substantiated its position based on two transfer pricing (TP) studies:
  • A 2011 economic analysis prepared by independent experts concluding that a 7.22% interest rate was at arm’s length. This study did not assess potential internal CUPs; and
  • A 2019 economic analysis, explicitly requested by the Belgian tax administration and prepared by the taxpayer to support its position, included a comparability assessment and applied a modified external CUP method.
• The modified external CUP approach of the taxpayer followed a structured three-step methodology:
  • The borrower’s stand-alone credit rating was determined;
  • Based on this, the applicable market yield curve was derived; and
  • Some comparability adjustments were made to adjust the rate for specific contractual features (e.g., liquidity, prepayment, and extension options)
• The Belgian tax administration rejected both TP analyses of the taxpayer. In particular, it did not agree with the subordination clause and excluded all comparability adjustments proposed by the taxpayer in its analysis. The Belgian tax administration maintained its own position which based on the parent company’s 2011 USD-denominated unsecured bond as the appropriate CUP.
   

Court’s decision

• The Court conducted its own benchmarking analysis and confirmed the modified external CUP as the most appropriate method. It found that the tax administration failed to demonstrate that the borrower’s credit rating was not at arm’s length, emphasizing that the burden of proof lies with the tax administration.
  
  
• The Court ruled that the subordination adjustment applied by the taxpayer should be disregarded, as it was not properly substantiated.
  
  
• The Court further held that the parent company’s unsecured bond could not serve as a reliable CUP, given the material differences and the extent of adjustments required to achieve comparability.
  
  
• Additional insight was provided by the Court of the following topics:
  • Credit ratings should be assessed on a stand-alone basis, considering the impact of the new debt quantum on the borrower’s financial position. Besides where implicit group support is considered, it must be properly substantiated via a thorough implicit support analysis and cannot be assumed by default. The underlying criteria need to be properly considered and supported; and
  • Subordination must be supported by economic rationale, noting that factors such as early repayment rights, absence of third-party lenders, and limited legal enforceability weakened the taxpayer’s argument.
     

Key takeaways and considerations

• Modified CUP considered reasonable: The Court confirmed the modified external CUP as a reasonable and reliable approach for assessing arm’s length nature of intra-group financing, to the extent that it is applied through a structured, data-driven benchmarking analysis covering determination of credit rating, yield curve and comparability adjustments.
  
  
• Stand-alone credit rating determination to reflect the debt quantum: A stand-alone credit analysis should consider the impact of the new debt on the borrower’s financial position. This reinforces the need for economically grounded credit rating and implicit support analyses in intercompany financing.
  
  
• Subordination to be properly supported: Inserting a subordination clause in an intercompany loan agreement without substantiation was considered insufficient. The Court took a position that it should be supported by real economic rationale and risk.
  
  
• Burden of proof lies with the tax administration: The Court reaffirmed that tax Belgian tax administration must substantiate claims to reject the taxpayer TP documentation properly.  Merely disagreeing with a taxpayer’s benchmark study is not sufficient. However proactive and well-structured TP documentation is essential.