Lower Administrative Court validates deferral of capital gains through intra-group reinvestment
In a judgment of 13 February 2026, the Lower Administrative Court (Tribunal administratif) ruled (No. 48945) in favour of a Luxembourg company (the "Parent Company") and its subsidiary (the "Acquiring Company"), both members of the same fiscal unity within the meaning of Article 164bis LITL and part of an operational food retail sector (the “Group”). The Acquiring Company had applied the rollover mechanism under Article 54 Luxembourg income tax law ("LITL") to defer a capital gain realised on a real property disposal in 2017, by reinvesting the sale proceeds into shareholdings in three sister companies acquired from its Parent Company (i.e., société-mère intégrante) in 2019.
The tax authorities denied the benefit of the Article 54 LITL regime at the level of the Acquiring Company on three grounds:
the newly acquired shares did not qualify as eligible reinvestment assets,
the transaction constituted an abuse of law, and
the pricing was not at arm's length. In particular, the tax authorities argued that the combined effect of Articles 54 and 166 LITL within the fiscal unity would result in the gain never being effectively taxed, since the Parent Company had benefited from the participation exemption on the very sale of those participations to the Acquiring Company. The Lower Administrative Court rejected all three challenges.
Lower Administrative Court's reasoning
Qualifying conditions under Article 54 LITL
Article 54 (1) LITL imposes specific conditions on the asset disposed of, but places no particular restriction on the nature of the reinvestment asset - the sole requirement being that it constitutes a fixed asset (i.e., immobilisation).
The lower Administrative Court recalled that fixed assets are defined under Article 21(2) LITL as assets "permanently allocated to the business", with the decisive criterion being the intended allocation rather than the nature of the asset itself. A taxpayer retains a margin of discretion to classify a shareholding as a fixed asset based on the specific circumstances of the enterprise. In this case, the lower Administrative Court identified three indicators supporting that classification:
The participations were recorded as financial fixed assets in the Acquiring Company's 2019 annual accounts, providing an initial indication of their intended permanent allocation.
The acquisition was designed to allow the Acquiring Company to continue operating as a central purchasing entity for the three operational companies it supplied exclusively, while also holding direct controlling or significant stakes in those companies.
The Acquiring Company purchased the near-entirety of the shares in two of the three sister-companies (99.99%) and a significant stake in the third (39.99%). Notably, Article 54 LITL does not prohibit reinvestment within a group or a fiscal unity.
The Lower Administrative Court also dismissed the tax authorities' argument that the reinvestment assets had to be "more appropriate" than the asset disposed of. Unlike Article 53 LITL, which expressly requires a replacement asset corresponding economically and technically to the asset lost, no such condition appears in the wording of Article 54 LITL.
Abuse of law under § 6 of the Adaptation Tax Law
As a reminder, an abuse of law under § 6 of the Adaptation Tax Law (in the new version applicable since 1 January 2019) requires three cumulative conditions:
use of legal forms and institutions;
the legal route pursued has, as a principal objective or one of its principal objectives, obtaining a tax advantage contrary to the object or purpose of the tax law; and
that legal route is not authentic, meaning it was not used for valid commercial reasons reflecting economic reality.
On the first condition, the lower Administrative Court agreed it was met, i.e. the share purchase agreements clearly involved legal forms and institutions.
On the second condition, even a temporary deferral of taxation suffices to constitute a "circumvention or reduction" of the tax burden. The purely temporary nature of the immunisation under Article 54 LITL does not prevent this criterion from being satisfied. The lower Administrative Court further found that the object and purpose of Article 54 LITL requires both that the asset disposed of had become unfit for the business and that the reinvestment asset be better adapted to serve its needs - neither of which was established by the taxpayer on the facts. The tax advantage obtained therefore ran counter to the object and purpose of Article 54 LITL, thereby satisfying the condition that the tax burden be circumvented or reduced contrary to legislative intent.
On the third and decisive condition, the Lower Administrative Court concluded that the detailed commercial explanations provided by the taxpayer were sufficient to establish valid economic reasons, such that the transaction could not be characterised as a non-authentic arrangement. In particular, the partial split of the Group’s assets in 2019 was found to have been genuinely carried through to completion, as evidenced by the subsequent restructuring steps and the ultimate sale of the remaining shareholdings by the Parent Company to a single third-party acquirer in July 2023.
The tax authorities were therefore not entitled to rely on § 6 of the Adaptation Tax Law to deny the benefit of Article 54 LITL. The Lower Administrative Court however explicitly noted that no criticism could be directed at the tax authorities for having raised the abuse of law argument, as the taxpayer had failed repeatedly to produce - both during the pre-litigation phase and in the course of proceedings - documents clearly in its possession. It was only following a request from the lower Administrative Court itself during deliberations that the key evidence was produced.
Valuation of the reinvested participations
The tax authorities lastly challenged the valuation of the shares acquired on the basis that said valuation had not been carried out by an independent third party, but by the Group itself. The lower Administrative Court rejected this challenge. Indeed, the taxpayer demonstrated that both internal and external valuations had been carried out, including a report from an independent third-party firm whose work covered the relevant sub-group and produced a valuation range consistent with the prices ultimately agreed. In the absence of any substantive rebuttal by the tax authorities, the Lower Administrative Court also held that the valuation was in conformity with the arm's length principle and rejected the tax authorities' comparison with historical book values as insufficiently substantiated.
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