Clarifications on the application of Articles 23 (3) and 41 LITL

On May 21st 2015, the Luxembourg Higher Administrative Court (“Cour Administrative” - the”Court”) took a decision on the valuation and classification of a receivable denominated in a currency other than Euro.

A Luxembourg company (the “Company”) initially recorded a CHF denominated receivable as a short-term receivable in its 2007 and 2008 accounts. From an accounting perspective, the receivable was converted in EUR by using the applicable foreign exchange rate at the end of the financial year. Latent foreign exchange gains and losses were taken into account for the determination of the income taxable basis. The Company made a claim against the tax assessments arguing that the receivable was erroneously recorded as a short-term asset valued at the year-end foreign exchange rate. The receivable should have been instead recorded as a financial asset and valued at its historical rate.

The Court confirmed that the provisions of Article 23 (3) of the Luxembourg income tax law (“LITL”) concerning the valuation of assets are applicable to all the assets other than the depreciable assets. Article 23 (3) LITL is thus applicable regardless of the classification of the receivables as a short-term asset or as financial asset. For tax purposes, a non-EUR denominated receivable has to be recorded at a value not exceeding its acquisition price which is determined in EUR by using the foreign exchange rate applicable at the time of the receivable was accounted for.

"In application of the prudence principle, latent foreign exchange gains are not taken into account unlike the latent foreign exchange losses."

The Court also ruled on the request of the Company to reclassify the receivable as a long-term asset rather than a short-term asset in application of Article 41 LITL even though this classification has no influence on the valuation of the receivable for tax purposes.

According to the Court, the modification of the tax balance sheet is, as per Article 41 (2) LITL, allowed, if (i) the initial balance sheet complies with the provisions of the tax law and (ii) such changes are justified by serious economic reasons.

The Court concluded that in the case at hand the first condition was met since

  1. the initial classification of the receivable as a short-term asset and its valuation at the year-end foreign exchange rate was not against the provisions of Articles 21 and 23 (3) LITL and the related applicable accounting principles and
  2. its reclassification as a financial asset to give a true and fair view of the accounting and financial situation of the Company and to prevent negative economic consequences of the erroneous classification of the receivable on the calculation of the financial ratio and the evaluation of the assets and activities of the Company by third-parties, were serious economic reasons in the meaning of Article 41 (2) LITL.

The Court also added that although it is not expressly required by the law but as a result of the principle of “accrochement du balance fiscal au bilan commercial”, the modification of the tax balance sheet in application of Article 41 LITL requires the parallel modification of the commercial balance sheet.

All the required conditions being met, the Court held that the receivable of the Company denominated in CHF could be

  1. valued at its historical cost determined by using the foreign exchange rate applicable at the time of the transaction and in parallel
  2. classified in the balance sheet as a financial asset.