As provided by the Income Tax Law (hereinafter “the Law”), the tax integration regime allows the integrating company and its subsidiaries to be taxed as if they form only one taxpayer. The profits and losses of the companies being part of the fiscal unity are consolidated at the level of the head of the fiscal unity which is allowed to compensate the profits against the tax losses of the group. Specific rules describe how tax losses of companies leaving the fiscal unity should be used. However, the treatment of tax losses of companies joining an already existing fiscal unity was, until now, not clear.
In the case at hand, the Luxembourg holding company (“Lux HoldCo”) formed a fiscal unity with two Luxembourg subsidiaries (“LuxCo 1 and LuxCo 2”) in 2004. In 2008, two other Luxembourg subsidiaries (“LuxCo 3 and LuxCo 4”) joined this fiscal unity. For the determination of its taxable result in 2008, Lux HoldCo offset the profits realised by the newly integrated companies against the existing tax carried forward losses of the fiscal unity.
The tax authorities erroneously considered that, in application of the principle set forth in article 114 of the Luxembourg Income Tax Law (“LITL”) according to which only those who incurred the tax losses is allowed to use them, only Lux HoldCo, LuxCo 1 and LuxCo 2 were allowed to use the existing tax carried forward losses of the tax unity. In order to refuse the compensation of the profits derived by LuxCo 3 and LuxCo 4 with the tax carried forward losses of the fiscal unity, they considered that Lux HoldCo was at the head of two separate fiscal unity groups. They were of the opinion that the existing tax carried forward losses realised by Lux HoldCo and LuxCo 1 and LuxCo 2 belonged to the first fiscal unity and refused to compensate such losses with the profits derived by LuxCo 3 and LuxCo 4 which they considered as forming the second fiscal unity with Lux HoldCo.
The questions which rose before the court were whether the addition of new companies in a tax integration group created a second tax integration and whether the losses carried forward by the fiscal unity before the entry of the newly integrated companies could be offset against the profits they realise when they are part of the fiscal unity.
Both the Lower Administrative Court and the Higher Administrative Court confirmed that the tax integration regime was an exception to the principle of individual taxation and as a result, the Law should not be interpreted extensively or restrictively.
The Court highlighted that subsidiaries can join the fiscal unity for a minimal period of 5 years and decide to leave the group afterwards. Even if the requirement of a minimal participation of 5 years has to be assessed individually by each company, the integration of new subsidiaries to the fiscal unity at a different point in time does not form a new tax integration, but an extension of the existing group.
The Court then confirmed the possible extension of scope of a fiscal unity, without triggering the formation of a second fiscal unity.
Regarding the use of the tax carried forward losses, the Court reminded that in the framework of a fiscal unity, the integrating company is viewed as the sole taxpayer. As a result of the fiscal unity, the head company of the fiscal unity becomes the owner of the profits and losses derived by its integrated subsidiaries. The integrating company is therefore allowed to use the losses against the global profits of the fiscal unity even though they have been realised by newly integrated companies.
Applying these rules, the Court subsequently concluded that Lux HoldCo, as the integrating company, was the owner of the tax carried forward losses realised by the fiscal unity before the entry of LuxCo 3 and LuxCo 4 to the group. As the owner of the tax carried forward losses, Lux HoldCo was allowed to offset them against its profits which included the profits realised by LuxCo 3 and LuxCo 4 once they had joined the fiscal unity.
These decisions provide some clarification of the fiscal unity regime. Indeed, the Luxembourg fiscal unity regime was inspired by foreign regimes, including the French regime. The French law provides for the possible extension of the scope of the tax integration while the Luxembourg regime was silent on this issue. By giving a positive answer to the question, the judges put an end to the uncertainties surrounding the extension of the scope of the fiscal unity. Although the Court took a clear position on the use of the tax carried forward losses during the fiscal unity and referred to the principle of strict interpretation of tax law in this respect, it is regrettable that they refused to comment on the possible illegality of certain provisions of the Grand-Ducal Decree taken in application of Article 164 Bis LITL with respect to the use of carry forward losses during the fiscal integration.