In its judgment dated 14 May 2020, the European Court of Justice (hereinafter “ECJ”) found the Luxembourg fiscal unity regime to be contrary to the freedom of establishment and the freedom to provide services. The Higher Administrative Court (Cour administrative) initially submitted three preliminary questions to the ECJ, each regarding a different aspect of the regime (see our newsletter of December 2018 for more details).
The prohibition of horizontal fiscal unities is contrary to EU law
First of all, at the time of the preliminary reference, Luxembourg law only permitted the formation of a fiscal unity between a resident parent company (or permanent establishment of a non-resident parent) and its resident subsidiaries (so-called “vertical fiscal unity”). Luxembourg law did not permit the formation of a horizontal fiscal unity regime between resident subsidiaries having a common non-resident parent. The ECJ held that this difference in treatment between resident parent companies and non-resident parent companies constituted an unjustified restriction of the freedom of establishment and the freedom to provide services.
As of 2015 and following the ECJ’s judgment in SCA Group Holding BV and Others (C-39/13), the Luxembourg fiscal unity regime was amended to allow the formation of horizontal fiscal unities for resident subsidiaries of a same non-resident parent company.
The obligation to dissolve an existing vertical fiscal unity in order to enter into a horizontal one is contrary to EU law
Also at issue in the case was that the current Luxembourg law provides that the transformation of a vertical fiscal unity into a horizontal fiscal unity (i.e. the addition of resident subsidiaries with a common non-resident parent) results in the dissolution of the vertical unity. If this occurs prior to the 5 year minimum period prescribed by the law, this will result in the retrospective taxation on an individual basis of the companies participating in the dissolved fiscal unity.
The ECJ held that this mechanism was contrary to EU law since a resident parent company may add a subsidiary to an existing fiscal unity regime without dissolving the existing fiscal unity whereas a non-resident parent company may only create a horizontal fiscal unity between its subsidiary companies by first dissolving an existing vertical fiscal unity which may trigger retrospective taxation for the participating subsidiaries.
To sum up, Luxembourg law may not require the dissolution of an existing vertical fiscal unity in order to enter into a horizontal fiscal unity.
No retrospective application of the horizontal fiscal unity regime
Finally, the ECJ confirmed the validity of the Luxembourg law which required a request for a fiscal unity to be filed before the end of fiscal year concerned. Such a limit did not, according to the ECJ, amount to a restriction that is contrary to EU law. In other words, taxpayers may not request the retrospective application of the horizontal fiscal unity regime.