On 10 May 2021, the Lower Administrative Court (Tribunal administratif) handed down a judgment addressing (a) the equity/debt qualification for tax purposes of Mandatorily Redeemable Preferred Shares (“MRPS”) and (b) whether a shareholding in a French Société à Prépondérance Immobilière à Capital Variable (SPPICAV) could qualify as an exempted shareholding for net wealth tax (“NWT”) purposes.
On the first question, the Lower Administrative Court concluded that the MRPS issued by the Luxembourg company and subscribed by its sole shareholder should be qualified as an equity instrument. The Lower Administrative Court reiterated that Luxembourg courts are not bound by the legal qualifications decided by the parties but can reclassify a transaction or instrument based on its economic and financial characteristics. The Lower Administrative Court recalled the criteria usually applied to distinguish debt and equity instruments in Luxembourg law:
- The attribution of voting rights to the lender/subscriber;
- The exposure of the lender/subscriber to profits or losses of the issuer;
- The right to receive a liquidation dividend;
- The level of subordination of the instrument compared to equity;
- The long-term maturity date of the instrument;
- The option to unilaterally convert the instrument into capital;
- The possibility for the issuer to reimburse the instrument by issuing shares;
- The presence of a stapling clause.
In the case at hand, the Lower Administrative Court acknowledged that according to a formal analysis the MRPS had many characteristics of a debt instrument such as a fixed term maturity date and a fixed return but concluded that the MRPS should be regarded as equity for tax purposes. In particular, the Lower Administrative Court noted that the MRPS were issued in the context of a capital increase and did not follow the usual formal requirements of a debt instrument such as a loan agreement including contractual guarantees in the event of default. Further, the Court remarked that the taxpayer had not established that the MRPS’s return rate was in line with the arm’s length principle and that the company’s sole shareholder was also the sole subscriber of the MRPS.
Furthermore, the Lower administrative Court held that a shareholding in a French SPPICAV was not exempt from net wealth tax. Luxembourg law provides that shareholdings held in companies referred to in Article 2 of the Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the “Parent Subsidiary Directive”) are exempt from net wealth tax. However, the Lower Administrative Court found that since the French SPPICAV benefits from an exemption from tax in France, it does not fall within Article 2 of the Parent-Subsidiary Directive and should therefore be included in the tax base for the determination of net wealth tax.