Tax Treatment of the Reversal of an Impairment

In a decision handed down on August 9th 2017 (docket No. 38981C), the Higher Administrative Court (Tribunal administratif) ruled on the tax treatment of the reversal of an impairment provision on financial assets.

In the case at hand, the taxpayer chose to write down long term loans granted to related parties. The book entry was done in a way that did not imply any movements on the profit and loss accounts (the “P&L”). As a consequence, the impairment provision did not decrease the company’s taxable result.

In a subsequent tax year, the value of the company’s financial assets was reassessed and the previously booked provisions were reversed by debiting the balance sheet account “Financial provisions” and by crediting the profits account “Exchange gains”. The reversal of the value adjustment increased the profit of the company whereas no loss was booked when the impairment was recorded.

The Luxembourg tax authorities considered the P&L impact of the reversal as a taxable profit, which was not off-set by carried forward losses (as the initial impairment had no P&L impact).

The Higher Administrative Court reversed this decision and held that, from a Luxembourg tax point of view, a reversal of value adjustments increasing the taxable profit was conceivable only if value adjustments reducing the company’s taxable profits had been accounted for in respect of a previous financial year.

As, in the present case, the impairment initially booked by the taxpayer had not reduced its taxable profits, the judges held that the subsequent reversal should not be included in the company’s taxable profit either.

Besides this substantive point, the Higher Administrative Court also dealt with an interesting procedural question. The government representative argued that a provisional tax assessment issued on the basis of §100a of the General Tax Law, i.e. in accordance with the taxpayer’s tax return, could only be disputed to the extent it did not effectively follow the filed tax return. The judges rejected this argumentation and ruled that the taxpayer is entitled to reconsider the position expressed in its tax returns in the context of an appeal against a provisional tax assessment.