Key takeaways
On 23 May 2025, the Luxembourg Lower Administrative Court (Tribunal administratif), in its judgment (no. 49212), overturned a unitary value (“UV”) tax assessment that had denied the net wealth tax exemption provided under § 60 of the Valuation Law (Bewertungsgesetz, “BewG”) for a participation held in a Delaware (USA) subsidiary. The Luxembourg direct tax authorities (Administration des contributions directes, “ACD”) had rejected the application of the exemption on the grounds that the subsidiary was not subject to comparable taxation, i.e. not fully subject to a tax corresponding to the Luxembourg corporate income tax (“CIT”). This decision provides valuable clarification on how to assess the “comparable taxation” requirement for entities located outside the European Union.
Facts of the case
A Luxembourg tax resident company held a 100% ownership in its U.S. subsidiary, which was tax resident in Delaware (USA). In its 2018 tax returns, the company claimed an exemption for the participation when declaring its net wealth tax and determining its unitary value as at 1 January 2018. The ACD rejected the exemption request, arguing that the U.S. entity was not fully subject to a comparable tax due to insufficient supporting evidence. The ACD argued that the U.S. subsidiary was located in a “preferential tax jurisdiction” and questioned the reliability of the documentation provided. In particular, they argued that, in the absence of a formal federal tax assessment and proof of payment, the comparability of the foreign tax could not be demonstrated. The taxpayer on the other hand argued that the concept of a “preferential tax jurisdiction” has no legal basis in Luxembourg tax law. It submitted a certificate of tax residence, the US federal corporate income tax return for FY 2018 (self-assessment), which showed an effective tax rate of 15.48% on the taxable income depicted therein and evidence of tax payments for that fiscal year.
Decision of the Lower Administrative Court
The Court upheld the taxpayer’s position and clarified how the notion of “comparable taxation” under § 60 BewG should be interpreted.
The Court confirmed that in order to be considered as fully subject to a tax corresponding to the Luxembourg corporate income tax within the meaning of § 60 BewG:
- the foreign company must not benefit from a full or partial subjective exemption, i.e., an exemption explicitly provided for by law (in line with prior case law, Tribunal administratif, 19 May 2022, no. 17634); and
- the effective tax rate of the foreign company must exceed half of the Luxembourg CIT (exceed 9% for FY 2021). The effective tax rate is defined as the ratio of tax due on the taxable income. In this case, the Court held that the Delaware subsidiary’s 15.48 % rate satisfies the comparability threshold.
The Court also emphasized that a federal tax assessment is not required, given that the United States operates under a self-assessment tax system. Therefore, the absence of a formal federal assessment is irrelevant. Furthermore, the Court underlined that evidence of comparable taxation is not restricted to any specific form. No appeal has been filed against the judgment, and it is thus final.
Conclusion
As the notion of being “fully subject to a tax corresponding to the Luxembourg corporate CIT” is not defined in the law per se, but solely referred to in parliamentary materials, this judgment provides welcome clarification regarding shareholdings in non-EU entities.
The scope of this decision should not be limited to net wealth tax solely as it’s underlying reasoning could also be used for the interpretation and application of the Articles 147 and 166 of the Luxembourg Income Tax Law, which respectively govern the Luxembourg participation exemption regime for withholding tax exemption and corporate income tax exemption.
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