In what is likely to become a landmark case, the Luxembourg Administrative Court ruled on 31 March 2022 that account 115 [of the Luxembourg standard chart of accounts] contributions – known as equity contributions without new issues of shares – are no longer to be taken into account in arriving at the minimum acquisition value of a participation when assessing eligibility for the parent-subsidiary exemption.
Up to now, such account 115 contributions had been a regular feature of the Luxembourg tax system due to their relative ease of use. Account 115 contributions notably do not require a notarial deed – as regular share premium increases do. However, they can also raise issues further down the line. For instance, the repayment of account 115 contributions would be viewed as a hidden distribution under Luxembourg law where retained profits were available and the company opted to repay the balance on account 115 instead of distributing dividends. In such a case, the balance thus repaid could be requalified as a dividend distribution and trigger withholding tax (in addition to the preparation and filing of the corresponding 900 tax form) depending on the country and nature of the recipient, the default rate being 15%. In addition, another grey area exists whereby account 115 balances should usually only be repaid where there exists an economic reason, which can be highly subjective at times as little guidance is available on the subject, lest they be also requalified as hidden distributions by the Luxembourg tax authorities.
The participation exemption is a result of the Parent-Subsidiary Directive. Under this exemption, companies that hold participations in underlying entities that 1) amount to at least 10% or EUR 1,200,000, and 2) are held or will be held for at least 12 months, can receive dividends free of withholding tax. Other criteria may have to be met to qualify for the exemption.
In the case at hand, a parent company had invested less than 10% in an entity and subsequently contributed amounts to account 115 of the subsidiary to meet the EUR 1,200,000 threshold. The underlying entity distributed a dividend to the parent company and withheld 15% on the dividend. The parent applied for a refund after meeting the 12-month holding period. The application was rejected by the Luxembourg tax authorities on the grounds that account 115 balances cannot be considered to count towards the share capital of the underlying entity. This position was upheld by the Luxembourg administrative tribunal in May 2021. The Luxembourg Administrative Court then confirmed the position of the administrative tribunal, the main reason revolving around a deemed, insufficient link between account 115 balances and the share capital of a given company.
As a result of this ruling, Luxembourg companies should reassess the way in which they fund subsidiaries. One way of complying with thresholds would be to contribute account 115 balances to the share capital (or at least share premium) of the underlying entity. Other implications, such as cost base for the purposes of capital gains, should be analysed.
If you have been using account 115 contributions in the past, JW Partner would be thrilled to help you assess the impact on your company and to help you find solutions to restructure your holdings, please reach out to us!