On 11 May 2021, the Lower Administrative Court (Tribunal administratif) ruled that contributions to the Account 115 should not be taken into account when determining whether the acquisition price of shares necessary to qualify for the participation exemption regime for withholding tax has been reached.
The case concerned a Luxembourg private limited company (“Company A”) that acquired shares in a Luxembourg public limited company (“Company B”) on 11 April 2014. On the same day, Company A made cash and in-kind contributions to Company B's Account 115. As a reminder, the Account 115 is an entry line in the equity section foreseen by the Luxembourg Standard Accounting Plan (Plan comptable normalisé), where contributions without the issuance of shares are to be recorded. Any contributions made by the shareholders to the company that do not take the form of a capital increase or a payment into the share premium account are recorded therein, given that no counterparty is received by the shareholder for those contributions (except the increase of value of the subsidiary) and that the contribution is definitive (i.e. no right of reclaiming the contribution until a distribution, capital reduction or liquidation occurs).
On 8 September 2015, Company A acquired additional shares in Company B. After this additional acquisition, Company A held 4.5% in the share capital of Company B. Without taking into account the contributions to the Account 115, the price that Company A paid for the shares in Company B was less than EUR 1.2 million, so that the thresholds foreseen under the participation exemption regime were not met. On 14 January 2016, Company B distributed dividends on which it withheld withholding tax. When Company A claimed the refund of this withholding tax, the relevant tax office denied the refund. Contrary to Company A's opinion, the tax office considered that the contributions to the Account 115 are not to be taken into account when determining whether the acquisition price of the shares of EUR 1.2 million has been reached to qualify for the exemption from withholding tax provided for by article 147 of the Luxembourg Income Tax Law (“LITL”). Company A's complaint before the Director of the Direct Tax Administration was rejected as unjustified. Consequently, Company A filed an action before the Lower Administrative Court against the decision of the Director of the Direct Tax Administration.
In its decision, the Lower Administrative Court considers that two conditions should be met by Company A in order to qualify for the exemption from withholding tax foreseen by Article 147 LITL. Firstly, Company A must have had a direct participation in the share capital of Company B. Secondly, the acquisition price of the participation in the share capital must be at least EUR 1.2 million. Even though the judges considered that first condition was met because Company A acquired shares in Company B on two occasions, they followed the position of the Direct Tax Administration and considered that the threshold of EUR 1.2 million was not reached. According to the judges, in the absence of a direct link between the price paid and the contribution to account 115, the latter cannot be taken into consideration when determining the acquisition price of the share according to article 147 LITL.
This judgement has been perceived as surprising as the judges seem to have added a time congruence requirement to the concept of acquisition price as defined by article 25 LITL, that is not clearly foreseen. As a reminder, article 25 LITL states that the acquisition price should include not only the price directly paid to acquire an asset but also all incidental expenses incurred to bring the asset into the condition it is at the moment of valuation.