By judgement dated 31 July 2019 (No. 42326C), the Luxembourg Higher Administrative Court (Cour Administrative) reiterated its interpretation of Article 164 of the Luxembourg income tax law regarding hidden dividend distributions.
In the matter at hand, the taxpayer, a Luxembourg resident company for the tax years in question (2013 and 2014) who since migrated to Malta, had waived receivables it held towards its subsidiaries. In addition thereto, the taxpayer had booked value adjustments on its shareholding in three other subsidiaries.
The aforementioned transactions had been requalified by the tax authorities as hidden dividend distributions, based on the mere assumption that these transactions would not be justified by economic reasons. The consequence was thus that the tax deduction derived from those expenses was rejected and added back to the tax base of the company.
In addition, the tax authorities applied a withholding tax on the hidden dividend distribution. The case was brought first to the Lower Administrative Court (Tribunal Administratif), which ruled in favour of the tax authorities and which ruling the taxpayer appealed.
The Higher Administrative Court first recalled that the burden of proof in matters of hidden dividend distributions lies with the tax authorities. It is only once the tax authorities have brought sufficient elements in order to demonstrate that a hidden distribution occurred, that the burden of proof is shifted to the tax payer who can then rebut the findings and arguments of the tax authorities. The Higher Administrative Court added that, without denying that the above-mentioned transactions may legitimately lead the tax authorities to request additional information, the fact remains that the justifications, provided by the tax-payer, even if only partially complete, are likely to justify the economic reality of the transactions at hand. As a result, the Higher Administrative Court confirmed the absence of hidden dividend distributions in the case at hand.
In conclusion, the Higher Administrative Court once again reiterated that hidden dividend distributions cannot be merely alleged by the tax authorities, but that an obligation lies on the tax authorities to proceed to a diligent analysis of the facts brought by the taxpayer. The mere unconventional appearance of a transaction does not replace the need for said diligent analysis of all facts and circumstances.