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Account 115 and Luxembourg Parent-Subsidiary Exemption
15/04/2022

On 31 March 2022, the Luxembourg Administrative Court ruled that account 115 contributions are not to be taken into account to determine the minimum acquisition value of a participation for the purposes of the Luxembourg parent-subsidiary exemption.

1. Legal context: the Luxembourg parent- subsidiary regime

›  Pursuant to articles 146 and 148 of the Luxembourg income tax law (“LITL”), dividends distributed by Luxembourg corporations are in principle subject to a 15% withholding tax (“WHT”).

›  Pursuant to article 147 of the LITL, the distributing subsidiary is however not required to levy the WHT when the dividend is distributed to a qualifying parent company (within the meaning of the Luxembourg parent-subsidiary regime) and, on the date the income is made available, such parent company holds or commits to hold directly for an uninterrupted period of at least 12 months, a participation of at least 10% or with an acquisition value of at least €1,200,000 in the share capital of the subsidiary.

› According to article 149 of the LITL, if the 12-month
holding period is not complied with at the time of the distribution, the distributing subsidiary must levy the WHT and a refund may be claimed by the parent
company as soon as it proves that the holding period has been fulfilled and that during the entire holding period the shareholding has not fallen below
the above-mentioned threshold of 10% or the acquisition price below €1,200,000.

2. Background of the case

› In 2014, a Luxembourg company (SARL) (the “Parent Company”) acquired shares issued by another Luxembourg SARL (the “Subsidiary”).

› The Parent Company further contributed an amount to the account 115 of the Subsidiary to reach, in total, an investment in the Subsidiary of at least €1,200,000. The Parent Company was not holding 10% of the share capital of the Subsidiary either.

› The Subsidiary distributed a dividend to the Parent Company and levied a 15% withholding tax because, at the time of the distribution, the Parent Company had not yet held its participation in the Subsidiary for at least 12 months.

› In 2017, after the lapse of the 12-month minimum holding period, the Parent Company applied for a refund of the withholding tax levied by Subsidiary.

› The Luxembourg tax authorities (“LTA”) refused to grant the refund on the basis that the contribution to account 115 cannot be considered as a participation in the Subsidiary's share capital and therefore the minimum holding threshold required to benefit from the exemption from dividend withholding tax is not met.

› In a judgement dated 11 May 2021, the Luxembourg Administrative Tribunal (“Tribunal”) confirmed the position of the LTA.

3. Position defended by the Parent Company

› The Parent Company then lodged an appeal before the Administrative Court (the “Court”) based on the following arguments:

i. The Luxembourg parent-subsidiary regime provides for two alternative conditions to benefit from the exemption: the minimum 10% shareholding threshold, which is to be assessed having regard to the share capital of the Subsidiary and the minimum acquisition value of the participation, which is to be assessed from the perspective of and based on the accounts of the Parent Company. Under this second threshold, it is only required that the acquisition value of a participation held in the share capital of the Subsidiary amounts to EUR 1,200,000;

According to articles 23 and 25 of the LITL, the purchase price of a participation also includes expenses supported by the purchaser to acquire it; contributions to the account 115 should be included in those incidental expenses;

It is admitted that hidden capital contributions should be taken into account to measure the minimum threshold for the parent-subsidiary exemption. As a result, an “informal” capital contribution should consistently follow the same treatment.

4. Decision of the Court

 

› The Court upheld the decision of the Tribunal and confirmed that there is no sufficient link between the account 115 and the share capital for the account
115 contributions to be taken into account to determine the minimum acquisition value of a participation. 

›  Based on case law of the Court of Justice of the European Union, the Court explained that a participation in the share capital relates to the holding by a parent company of shares in the capital of its subsidiary as only the shares materialise the legal relationship between the parent company and the subsidiary;

›  The Court then explained that, based on article 25 LITL, the acquisition cost of an asset is all expenses supported by the purchaser to acquire it. However, according to the Court, an expense can only be taken into consideration to measure the acquisition cost of a participation if this expense increases the number of shares held by the shareholder, the nominal value of those shares or is directly linked to such increase;

›  The Court concluded that there is no sufficient link between the account 115 and the share capital of a company to consider that a contribution to the account 115 should increase the acquisition cost of the participation. Indeed, according to the judges, contributions to account 115 neither provide new shares to the shareholder nor increase the value of the existing shares;

› Accessorily, the articles of incorporation of the Subsidiary did not provide that the account 115 contribution was allocated only to the Parent Company and therefore it was not possible to determine what portion of account 115 should be allocated to the Parent Company as opposed to the other shareholders. We however understand that, even if the articles of Subsidiary had allocated the account 115 contribution only to the Parent Company, the decision of the Court would not have been impacted given the stance of the judges with respect to the determination of the acquisition value of a participation mentioned above.

5 . Recommendations and next steps

All structures using account 115 contributions should be reviewed to ensure that the parent company holds at least 10% of the share capital of its subsidiary or that the minimum acquisition cost is met through instruments sufficiently linked to the share capital of such subsidiary (i.e., statutory capital or share premium). If that is not the case, it is recommended to incorporate the account 115 contributions into the share capital (and as the case may be the share premium) of the subsidiary or to explore other alternatives to comply with the decision of the Court.

A strict reading of the decision of the Court’s decision may lead to think that account 115 contribution should not be considered to measure the capital gain realised on a participation, i.e., that the contribution to account 115 would not be part of the acquisition cost of the participation as a whole. In our view this is however not what the Court was trying to achieve when rendering its decision. There are indeed good arguments that the account 115 contribution would still be taken into account as part of the initially invested capital as opposed to the capital gain on a participation upon a disposal, provided it is registered as equity in the accounts of the subsidiary and forms part of the acquisition cost of the participation in the Lux GAAP account of the shareholder, even though not qualifying for the minimum acquisition value of a participation in the company’s share capital within the meaning of the parent-subsidiary regime.

Although the case at hand relates to the dividend withholding tax exemption provided by article 147 of the LITL, the decision of the Administrative Court should also apply to the dividend income exemption and capital gain exemption provided by article 166 of the LITL and the Grand-Ducal Regulation of 21 September 2001, respectively.

Voir aussi : Linklaters LLP (Luxembourg) ( Mr. Joakim-Antoine Charvet ,  Ms. Danièle Buchler )

[+ http://www.linklaters.com]

Mr. Joakim-Antoine Charvet Mr. Joakim-Antoine Charvet
Managing Associate
[email protected]
Ms. Danièle Buchler Ms. Danièle Buchler
Managing Associate
[email protected]

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