In 2009, two of the three shareholders of a Luxembourg resident corporation (hereafter “LuxCo”) agreed to buy-out, at fair market value, the third shareholder by exercising their pre-emption rights, in order to avoid a third party acquiring shares in the company. If said third party had acquired shares in Luxco it would have resulted in Luxco being forbidden to continue its current economic activity due to a conflict of interest in its regulated field of activity. Instead of holding onto the shares, the two shareholders resold the acquired shares to LuxCo itself for the same price. As a result, LuxCo was holding approximately 50% of its own shares. LuxCo decided not to cancel the repurchased shares.
The two remaining shareholders spent several years searching for new shareholders to whom those shares could be sold without creating a conflict of interest. Finally, in 2011, several new shareholders were found, to which the shares of LuxCo (held by LuxCo itself) were sold at the then applicable fair market value. As, during those three years in which LuxCo held its own shares, its business activity declined due to deteriorating market conditions, LuxCo ended up realizing a loss on the disposal of its own shares to the new shareholders. The Luxembourg tax authorities considered that pursuant to this mechanism, the losses that should have been borne by the shareholders were effectively transferred to LuxCo and as such the tax deductibility of said loss was refused and it was requalified as a hidden dividend distribution.
The Lower Administrative Court refused to follow the Luxembourg tax authorities’ position.
The Court agreed that there was no hidden dividend distribution and confirmed the tax deductibility of said loss on the disposal. They made this decision on the grounds that LuxCo proved to a sufficient extent that:
The fact that the former shareholder received a lower considerations for his shares in LuxCo from the existing shareholders, pursuant to the exercise of the pre-emption rights, than the one proposed by the third party and that LuxCo had its own economic interest in mind when repurchasing its own shares (rather than the interests of its shareholders) seems to have convinced the judges of the Lower Administrative Court.
Whether all uncertainties revolving around transactions with own shares are now dissipated still remains to be seen as