On 31 March 2022, the Higher Administrative Court (Cour administrative) ruled that shareholder contributions to a subsidiary’s account 115 are not taken into account for computation of the acquisition price of the shareholding under the Luxembourg participation exemption regime.
The account 115 is a specific account under the Luxembourg chart of accounts which enables shareholders to make a contribution to a shareholding’s capital without issuance of new shares. Contributions to account 115 can be made under private seal, without formalisation by a Luxembourg notary, which has made them a popular mechanism in Luxembourg. Such contributions have until now been included when assessing the shareholding threshold for the purposes of the Luxembourg participation exemption.
As a reminder, pursuant to the Luxembourg participation exemption regime dividends paid from the subsidiary company to its parent company are exempt from withholding tax if the parent company holds more than 10% of the subsidiary company’s share capital, or if it has acquired the subsidiary for an amount of EUR 1.2 million. Gains on the sale of the shareholding are exempt in the hands of the Luxembourg parent company if the latter holds more than 10% of the subsidiary company’s share capital or if the shareholding was acquired for at least EUR 6 million.
Facts of the case
In the case at hand, a taxpayer had acquired shares representing less than 10% of a company’s share capital (the “Subsidiary”) for an acquisition price of less than EUR 1.2 million, but had made separate contributions to the Subsidiary’s 115 account for a total amount exceeding EUR 1.2 million. In 2016, the Subsidiary distributed a dividend to the taxpayer which was subject to 15% withholding tax. In 2017, the taxpayer submitted a request to the Luxembourg Tax Authorities (the “LTA”) to obtain a refund of the withholding tax paid, on the grounds that the conditions of the Luxembourg participation exemption regime were satisfied. The reimbursement request was rejected. The taxpayer challenged this decision in an administrative appeal which was rejected by the LTA. The Lower Administrative Tribunal (Tribunal administratif) also rejected the taxpayer’s appeal. The taxpayer appealed the judgment to the Higher Administrative Court (the “Court”).
The Court held that contributions to account 115 are to be disregarded for the computation of the acquisition price for the purposes of applying the Luxembourg participation exemption. In other words, contributions to account 115 are not taken into account for the purposes of determining whether the EUR 1.2 million or EUR 6 million thresholds have been met.
Luxembourg law defines “acquisition price” as the expenditure incurred to put the asset in the condition in which it is on the day of its evaluation. In the context of the acquisition price of a shareholding, the Court held that an expenditure should be considered as part of the acquisition price only if it results in an increase of the number of shares or in the nominal value of the shares.
Since a contribution to account 115 results neither in a shareholder receiving more shares nor in an increase in the nominal value of the existing shares, the Court concludes that there is no sufficient link between account 115 and the share capital to consider informal contributions as forming part of the acquisition price of the shareholding. The Court’s decision is final and cannot be appealed.
This decision represents a significant change to current Luxembourg practice. Taxpayers who do not hold more than 10% of their shareholding’s share capital and who do not meet the EUR 1.2 million or EUR 6 million thresholds (excluding any account 115 contributions) should consider their position in light of this ruling.
More broadly, the Court’s decision leaves a lot of questions unanswered regarding the tax qualification of account 115 contributions, since the Court did not consider whether these should be treated as hidden capital contributions or as a type of expenses (and thus, in principle, deductible items).