A recent judgment from the Luxembourg administrative tribunal of 11 May 2021 illustrates the unpleasant consequences which may result when corporate and tax aspects are not aligned.
In this judgment, the Luxembourg tax administration refused to reimbursed the withholding tax levied on dividend distributed by a Luxembourg company to its parent company on the basis that one of the conditions to benefit from the Luxembourg participation exemption regime was not met.
In a nutshell, the Luxembourg income tax law provides for an exemption from withholding tax in case of dividend distributions if, among other conditions, the parent company holds a qualifying shareholding in its subsidiary. Such condition is fulfilled if, notably, the parent company holds a participation of at least 10% in the share capital of its subsidiary or alternatively has acquired the shares for an acquisition price of at least €1.2million. If the exemption has not been granted immediately for various reasons, the taxpayer may claim a refund later on.
In the case at hand, the parent company acquired less than 10% of the share capital of a Luxembourg company, such acquisition being documented in a share purchase agreement. Simultaneously, the parent company contributed cash and assets to the so-called “115 account” (share capital contribution without issuance of shares) of its subsidiary, as reflected in a contribution agreement.
As the 10% threshold was not met, the debate focused on the alternative €1.2million threshold and notably on the question of whether the amount contributed to the 115 account had to be considered to assess the €1.2million threshold. The defendant argued that not only the acquisition price of the shares mentioned in the share purchase agreement had to be taken into account but also the contribution made to the 115 account. The Luxembourg tax authorities objected to such approach and the case was referred to the administrative tribunal.
The administrative tribunal noticed that no explicit references of the link between the share purchase agreement and the contribution agreement was made in any of these documents (despite the fact that both agreements were entered into on the same date). It therefore ruled that the contribution made to the 115 account could not be taken into consideration for the purposes of the €1.2 million threshold.
Even if the administrative tribunal did not mention it, the outcome could have been different if both the share purchase and the contribution agreements would have been drafted differently. This would have supposed that both corporate and tax aspects would have been aligned.
This case is a good example of how important is the collaboration between practices, especially corporate and tax in this particular case, and this is why “collaboration” is one of Hogan Lovells keystone.