In its judgment of 14 July 2020, the Luxembourg Higher Administrative Court (Cour Administrative) assessed whether the subscription of bonds by a Luxembourg family wealth management company, a société de gestion de patrimoine familial ("SPF") and the deduction of interest at the level of the issuer, a Luxembourg civil company held by the same individuals as the SPF, can be considered as an abuse of law under §6 of the Luxembourg Steueranpassungsgesetz (“StAnpG”).
In its judgment, the Court confirms the judgment of the Lower Administrative Court (Tribunal Administratif), which found the structuring to be an abuse of law within the meaning of §6 of the StAnpG (see our newsletter dated 4 December 2019). In contrast to the Lower Administrative Court, the Higher Administrative Court analysed whether the entities involved were legally entitled to issue and subscribe to the bonds.
The Court began by analysing the right for a Luxembourg civil company to issue bonds. It concluded that Luxembourg company law foresees the possibility to issue bonds exclusively by commercial companies, so that a civil company does not have the right to finance itself by issuing bonds.
The Court continued by assessing whether in the case at hand the SPF was entitled to subscribe to the bonds. The Court points out that pursuant to the law of 11 May 2007 on SPF companies (“SPF Law”), SPFs are in principle entitled to subscribe to bonds. The Court added that this right has to be refused, if the subscription of bonds seeks to circumvent the prohibition for an SPF to grant remunerated loans foreseen by the commentary to the SPF Law. The Court therefore analysed if the bonds in question meet the main characteristic of bonds, namely the collective nature of the debt and the negotiability of the bonds. The Court considered that in the case under consideration, the existence of a single bondholder, the SPF, is not prejudicial to the collective nature of the debt. The collective nature must however be denied if, as in the present case, the creditor and debtor are identical because they have the same shareholders and managers. With regard to the negotiability of the bonds, the Court concludes that the quality of the bondholders, which are members of the same family, makes it illusory that they could actually be transferred to a third party.
Finally, the Court considered that the conditions for abuse of law within the meaning of §6 of the StAnpG are met in the present case. It considered that the structure constituted a use of private law forms or institutions, which made it possible to circumvent or reduce the tax liability of the taxpayer. This structuring was contrary to the legislator's intention since the legislator's intention was to prohibit a civil company from issuing bonds and to prohibit an SPF to function as a financing vehicle by granting remunerated loans to other companies of the group.
The judgment illustrates the importance that the Court attaches to the fact pattern underlying a case in determining whether there has been an abuse of law. It is also worthwhile to note that the Court equated the possibility to postpone taxation until a distribution from the SPF to the shareholders, to a tax advantage that fulfils the conditions of the abuse of law provision.