In a recent decision (No. 39382C dated May 29th 2018), the Higher Administrative Court of Luxembourg expanded on the transfer by a taxpayer of business assets to its private wealth.
The transfer and allocation of assets is generally of great significance for individuals undertaking commercial activities in their own name, since private assets are subject to taxes according to the tax rules applicable to individuals (e.g. not subject to municipal business tax) whereas business assets are part of the commercial activity of the taxpayer and subject to the commercial tax rules (e.g. subject to municipal business tax).
In the case at hand, the asset in question was a stone quarry, which was originally exploited as a commercial activity, but was then transferred by inheritance and subsequently gifted to a taxpayer who didn’t undertake a commercial activity therein, but solely rented out said quarry to a company in exchange for a rental income. On April 25th 2005, the exploiting company purchased the stone quarry from the taxpayer, thus leading to the question whether said stone quarry had to be considered a business asset or a private asset in the hands of the taxpayer benefiting from the gift. The tax authorities concluded that the stone quarry remained a business asset despite the various inheritances and gifts. As a result, the sale price received for the disposal of the stone quarry should be taxed as a gain resulting from the liquidation of a business rather than a gain on the disposal of a private real estate property (that would have been subject to a lower tax rate).
In order to determine whether an asset should be considered as having exited the business and entered the private wealth of the taxpayer, the Higher Administrative Court applied a formal analysis followed by an analysis of the facts. Under the formal analysis, the Higher Administrative Court analysed the transmission of the quarry in the course of the inheritance and noted that since the stone quarry represented the fundamental asset of the commercial activity of the deceased, the taxpayers de facto inherited a commercial enterprise and not merely a single asset. With regard to the ensuing gift of the quarry, the Higher Administrative Court confirmed that such a gift could either be construed as a disposal of a single asset (the asset thus being treated as a private asset in the hands of the beneficiary) or a transfer of a commercial activity (the asset thus being treated as a commercial asset in the hands of the beneficiary). At this stage, the Higher Administrative Court resorted to a factual analysis and concluded that, based on the facts, the quarry was again the sole asset of the commercial enterprise and that the beneficiary of the gift continued to report the rental income from said quarry as a commercial income, the quarry effectively represented a commercial asset, which the taxpayer implicitly accepted by the way he filed his tax returns.
In conclusion, the Higher Administrative Court’s decision relied heavily on the specific factual pattern of the case and confirmed that a transfer of business assets to the taxpayer’s private assets requires a positive act of removal (i.e. a sale, a distribution or a gift), which should be reported coherently (in the tax filings). Transfers of assets which represent the sole and fundamental assets of a commercial activity require particular attention.