ATOZ Insights and Taxand Intelligence October 2013

Greetings,

The summer came to its end and governments and international institutions got back to work on tax matters with a fresh energy. During the G20 summit held on 5-6 September 2013, the G20 leaders reiterated their common will to tackle Base Erosion and Profit Shifting and to move forward automatic exchange of information as being the new standard. A few days after, the press reported that the EU Commission asked some EU Member States, including Luxembourg, to provide information on their practice of tax rulings. The idea would be to check if these rulings are in line with EU state aid rules. We will keep you informed on any developments.

From a domestic standpoint, the atmosphere is more serene.

Luxembourg, always careful to remain an attractive and competitive jurisdiction, is working on implementing a private foundation law.

The Luxembourg tax authorities released a long awaited circular clarifying practical issues raised by the application of the rules on minimum corporate income tax.

Luxembourg courts ruled on several interesting cases, applying transfer pricing rules to financing activities, clarifying the condition of the participation exemption in case of migration of a subsidiary and providing additional clarifications as regards exchange of information upon request.

Best regards,

Olivier Remacle, Partner

SUMMARY

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TAX NEWS

G20 Leaders commit to OECD BEPS proposals: geographic issues will cause implementation “nightmare"

The Leaders’ Declaration at the G20 meeting in St Petersburg has committed to the development of two key initiatives: automatic exchange of information and the progression of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS).

Amidst this declaration, however, is a failure to recognise that the OECD’s Action Plan – despite the fact that its intentions should be welcomed - is perhaps the most ambitious document tabled on corporate tax in recent times. It undoubtedly has the potential to be a genuine game changer for the international tax system.

The OECD should be congratulated for embarking on such a colossal initiative and one which by its nature alone will be fraught with difficulties. The timescale alone is hugely ambitious, as are some of the expectations, a number of which are arguably unrealistic within the projected deadlines.

Whilst a number of the proposals – particularly those simplifying procedures for multinationals - should be welcomed, substantial questions remain over the nature of the BEPS initiative and its outcomes. Perhaps the most fundamental question is around who will be driving the reform, particularly if it is to be a truly global project. A number of the G20 constituents, including large, developing economies such as Argentina, China and Brazil are not members of the OECD. There is therefore substantial risk that the OECD will lack the firepower to harness and control the G20 on this issue and implementation will undoubtedly be a nightmare issue further down the line.

The EU dimension is also disregarded. Given the substantial amount of law and case law already in place, how will reform of the tax system be introduced and how will it be compatible with EU rules? The Action Plan also throws out any prospective idea around unitary taxation, somewhat of a slap in the face to the EU’s work on the Common Consolidated Corporate Tax Base (CCCTB).

Geographic issues also arise regarding the effect of the proposals on developing countries. The report pays lip service to developing nations, but there are no real recommendations for reforming their existing systems. The result leaves us somewhat unclear as to which is highest up the OECD’s priority list - is the BEPS initiative more about the public’s concern over multinational tax planning, or the concerns arising from profits being diverted away from developing countries?

But perhaps the biggest concern is that the report fails to address the over-arching question of whether the taxation of business is the best way forward, both from an economic and moral perspective, as a solution to economic stagnation. Moreover, the document avoids any discussion of the intellectual basis for the recommendations, particularly around the concept of ‘fairness’ and what constitutes ‘aggressive’ tax planning. You would expect a stronger intellectual foundation for proposals which could fundamentally change the global system. The OECD needs to benchmark the correct way forward and agree what is ‘fair’ and whether it is, for example, a specific effective tax rate.

It remains to be seen how a global consensus will be achieved on the back of these initial proposals. Whilst one option is for the OECD to make specific recommendations, they will have no binding effect and importantly, most governments are currently dealing with their own significant budget deficits so are concentrating on stimulating growth - often by attracting investment through attractive tax regimes - above anything else.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu ( ).

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Tax authorities clarify practical issues around the minimum CIT

From 2011 until 2012, only unregulated companies with a minimum of 90% of financial assets in their total balance sheet were subject to a minimum Corporate Income Tax (CIT) in Luxembourg. The market referred to the minimum CIT of SOPARFIs, which amounted to EUR 1.500 (EUR 1575 including the 5% solidarity surcharge).

Since 2013, all Luxembourg tax resident companies, whether regulated or not, are subject to a minimum CIT. There are however 2 different types of minimum CIT, depending on the activity performed by the Luxembourg tax resident Company:

  • A minimum CIT of EUR 3.000 (EUR 3.210 including the 7% solidarity surcharge) applies to Companies tax resident in Luxembourg which hold more than 90% of financial assets. This minimum CIT is basically the SOPARFI minimum CIT which was in force in 2011 and 2012, but its scope has been extended to regulated entities and its amount increased from EUR 1.500 to EUR 3.000.
  • A minimum CIT which varies between EUR 500 for a total balance sheet of up to EUR 350.000 and EUR 20.000 (EUR 21.400 if we include the 7% solidarity surcharge) for a total balance sheet of more than EUR 20.000.000 applies to all other companies which are tax resident in Luxembourg and do not fall under the first mentioned category.

The Luxembourg tax authorities have released a Circular which aims at clarifying certain practical issues when applying the new rules on minimum CIT, a distinction being made between the regime which applied in 2011 and 2012 and the one applicable since 2013. Since the law and the related commentaries left many questions open, this long awaited Circular is very welcome. The Circular deals with both the regime applicable since 2013 and the one applicable before, given that the tax years 2011 and 2012 may not have been assessed yet.

We present below the most important clarifications made by the tax authorities in the Circular. For a general presentation of the minimum tax regime of Luxembourg Companies, we refer to our previous newsletters: "2011 tax measures" and "Budget 2013: Tax measures".

Minimum CIT regime 2011 and 2012

In 2011 and 2012, only unregulated Luxembourg tax resident companies (i.e. companies not subject to prior authorisation) were subject to a EUR 1.500 minimum CIT (EUR 1.575 taking into account the 5% solidarity surcharge) and this, only to the extent their closing commercial balance of the related tax year was composed of more than 90% of financial assets within the meaning of the accounting law, reference having to be made to certain items of the accounting plan which are considered as financial assets.

As far as this minimum CIT applicable in 2011 and 2012 is concerned, the tax authorities have clarified that:

  • The fact that a Company is not taxable in Luxembourg during the full tax year (Company incorporated or liquidated within the course of the year) has no impact on the amount of minimum tax due. The full amount is therefore due, which appears quite logical given that the minimum CIT is the minimum of tax that a resident Company should pay each tax year.
  • An interest in a partnership is regarded as a financial asset and is therefore taken into account in order to compute the 90% threshold. This means that tax transparency principle (according to which one would have looked through the partnership and considered the partnership’s assets as directly held by the Luxembourg resident Company) does not apply for minimum tax purposes. Shares in a corporation and interest in partnerships are therefore treated in the same way for minimum CIT purposes, namely as financial assets.
  • Only companies tax resident in Luxembourg are subject to the minimum CIT, meaning that Luxembourg Permanent Establishments of foreign companies are not subject to this minimum CIT.
  • If a company is liquidated and the liquidation period does not exceed three years, the minimum CIT is determined based on the liquidation closing balance sheet, i.e. the balance sheet which is prepared before the liquidation proceeds is distributed. In case the liquidation takes more than 3 years, the minimum CIT will be due annually, based on the closing balance sheet of each year, the last minimum CIT being computed based on the liquidation closing balance sheet.
  • Assets which are exempt in Luxembourg based on a Double Tax Treaty (DTT), such as foreign real estate or assets attributable to a foreign PE, have to be taken into account in the total closing balance sheet in order to determine whether the 90% threshold is met or not. Note that, as explained later on, a different position is adopted by the tax authorities as regards the minimum CIT regime applicable to the years 2013 and following.
  • In case of tax consolidation, the minimum of 90% of financial assets has only to be tested at the level of the top company or PE, which is the only one subject to CIT during the tax consolidation period.
  • Tax credits and withholding taxes remain creditable against the minimum CIT.
  • The fact that a Company is subject to the minimum CIT does not impact the amount of tax losses carried forward.

Minimum CIT regime 2013 & following

Since 2013, as mentioned above, there are 2 types of minimum CIT:

  • one of EUR 3.000 (EUR 3.210, solidarity surcharge of 7% included) due by Luxembourg tax resident “financial” companies, regulated or not (meaning that SICAR and Securitisation Companies are now in the scope of the minimum CIT), holding at least 90% of financial assets and
  • one which varies between :
    • EUR 500 (EUR 535, solidarity surcharge of 7% included) for a total balance sheet of up to EUR 350.000 and
    • EUR 20.000 (EUR 21.400, solidarity surcharge of 7% included) depending on the level of the balance sheet and which applies to all other Luxembourg tax resident companies not falling under the “financial” category.

In order to determine to which minimum CIT a Luxembourg resident Company is subject, one has first to check whether the Luxembourg tax resident Company holds more than 90% of financial assets or not.

To do so, the same principles applicable as for the 2011 and 2012 minimum CIT apply. It means that to determine if the 90% threshold of financial assets is met, the closing commercial balance sheet is used. Interests in partnerships are considered as financial assets and tax transparency does not apply.

However, and this differs from the 2011/ 12 minimum CIT, certain assets have to be disregarded in order to make sure that the minimum CIT does not contravene Double Tax Treaties (“DTT”s): the book value of assets which generate or may generate income whose exclusive taxation right belongs to a country with which Luxembourg has concluded a DTT have to be disregarded, i.e. removed from the total balance sheet. Assets which have to be disregarded are for example real estate located in a DTT country or a Permanent Establishment (“PE”) located in a DTT country. Once these exempt assets have been removed, the 90% financial assets test has to be made.

If the Luxembourg tax resident Company holds 90% or less of financial assets, it will be subject to a minimum CIT varying between EUR 500 and EUR 20.000, depending on the size of its balance sheet.

In addition, the following rules will apply:

  • If a company is incorporated or liquidated during a tax year, the entire minimum CIT is due, in the same way as for the 2011 and 2012 minimum CIT.
  • If a company is absorbed in a merger or demerger, the balance sheet (of the disappearing company) as at the day of the merger or demerger will be used as a reference in order to determine the amount of minimum CIT due.
  •  If a company is liquidated and the liquidation period does not exceed three years, the minimum CIT is determined based on the liquidation closing balance sheet, i.e. the balance sheet which is prepared before the liquidation proceeds is distributed. In case the liquidation takes more than 3 years, the minimum CIT will be due annually based on the closing balance sheet of each year, the last minimum CIT being computed based on the liquidation closing balance sheet.
  •  If a company transfers its statutory seat and central administration to a foreign country, the balance sheet prepared for the transfer will be used as a reference in order to determine the amount of minimum CIT due.
  •  Tax credits (i.e. tax credits for investments in risk capital, investment tax credits, tax credit for hiring unemployed people and tax credits for the costs of vocational training) remain applicable but cannot bring the CIT due below the amount of the minimum CIT, solidarity surcharge included. Since the tax credit for investments in risk capital cannot be carried forward, it is credited in first place. Foreign and Luxembourg withholding taxes remain creditable against the minimum CIT.
  •  A company’s tax losses carried forward shall not be affected by the minimum CIT.
  •  As far as tax consolidation is concerned, the rules have changed in 2013, compared to the regime which applied in 2011 and 2012. The minimum CIT is now computed not only at the level of the top Company, but also at the level of each of the consolidated entities. If the total minimum CIT (minimum CIT of the top Company increased by the minimum CIT of each of the consolidated entities) is higher than EUR 21.400 (7% solidarity surcharge included), only the amount of EUR 21.400 is due. The Circular clarifies in this respect that (no matter whether the minimum CIT paid by the Top Company is composed partly or not of the minimum CIT of the consolidated entities), the minimum CIT paid is always considered as a tax advance at the level of the top Company only.

 For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu.

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Luxembourg introduces the private foundation (fondation patrimoniale)

The private banking sector was eagerly awaiting this moment: the introduction of a private foundation in Luxembourg. A draft law has been filed by the Luxembourg government this summer with a view to introduce into Luxembourg Law a new investment vehicle: the private Foundation (Fondation patrimoniale). The private foundation is intended to be a tailor-made wealth and estate planning tool for individuals and private wealth entities. The draft law also provides for a major innovation to avoid double taxation of individuals: introducing the concept of a “step up” for individuals.

What is a foundation?

Private foundation schemes already exist in Austria, Belgium, Germany, the Netherlands and Switzerland. These schemes have similar features: the foundation is an ad hoc vehicle to which assets are allocated by one or more persons, i.e., the founder(s). The foundation receives the ownership of the assets and manages them for the benefit of designated persons, i.e. the beneficiaries.

As a main characteristic, foundations enjoy the legal personality but do not have shareholders or members. As such, they are called “orphans”.

Wealthy individuals and families use private foundations for the following reasons:

  • Preserve the integrity of the familial estate: the familial estate remains the property of the foundation;
  • Ensure continuity in the management of family businesses : the foundation makes a distinction between ownership of assets and their management;
  • Ensure privacy;
  • Realise specific objectives: e.g. incorporation of a foundation to ensure that an invalid person will benefit from sufficient resources even in case of death of their relatives.

With the introduction of a private foundation, Luxembourg intends to reinforce its position in the sector of wealth and estate planning.

Luxembourg private foundation: main legal characteristics

Orphan legal entity

The Luxembourg private foundation is a legal entity separate from its founders and beneficiaries. Its legal characteristics are mostly similar to the ones applicable to joint stock companies. The main difference is that the private foundation is an orphan structure, deprived of shareholders or members. This difference has consequences as regards inheritance. While the shares or the interest in Luxembourg companies remain in the estate of the deceased person, the capital contributions of the private foundation are considered as going out of the estate of the founder during his/her life.

Conditions of incorporation

Individuals and private wealth entities are the only persons entitled to create a private foundation. The foundation has to be set up before a notary. A minimum endowment capital of EUR 50.000 is required and must be paid up in cash or in kind.

Registration, filing, financial statements

Despite the absence of business activity, foundations are registered with the Luxembourg Trade and Companies Register. Foundations are required to draw up financial statements but are relieved from any filing and publication requirements.

Absence of general meetings

Given the absence of shareholders, no general meetings are held. This has consequences on the functioning of the Luxembourg private foundation. The rules governing the amendment of the bylaws, the approval of the accounts, etc. differ from the ones governing Luxembourg companies.

Luxembourg private foundations also differ from other ordinary foundations governed by the law of 21 April 1928, first in their purpose, but also in their functioning, as ordinary foundations are supervised by the Ministry of Justice, which is not the case of private foundations. Private foundations are tools for private wealth management and estate planning purposes, but still may be active in the charitable or non-profit making sector but these activities should remain ancillary.

Private foundations with no dedicated premises should be domiciled with a domiciliary company within the meaning of the law of 31 May 1999.

Certificate holders

The private foundation can issue certificates to designated beneficiaries (i.e. designated individuals or private wealth entities) in relation to specific assets. The certificates represent a division of ownership rights of these assets. The foundation remains the legal owner but the holder of the certificate is entitled to receive income. If certificates are granted in relation to shares, the holder of certificates is entitled to exercise voting rights and to receive dividends. The foundation is not entitled to dispose of assets in relation to which it issued certificates.

Luxembourg private foundation: tax aspects

A vehicle liable to corporate income tax: The draft law adds the private foundation to the list of vehicles liable to corporate income tax. The private foundation is therefore a fully taxable Luxembourg Company even though certain types of income are subject to a specific tax treatment.

Corporate income tax exemptions: The draft laws offers to the private foundation wide Corporate Income Tax (“CIT”) exemptions. The following are exempt:

  • income from movable assets (revenus de capitaux mobiliers) as defined by article 97 Income Tax Law (“ITL”);
  • capital gains realized upon the sale of assets generating income from movable assets as defined by article 97 ITL;
  • long term capital gains on movable assets;
  • capital and surrender value in case of life, death, invalidity insurance.

 As a counterpart, the related losses are not tax deductible.

Specific provision: In case of transfer of assets from the foundation to the beneficiary, the beneficiary is deemed to acquire them at the acquisition cost booked by the foundation.

NWT exemption: The private foundation is exempt from Net Wealth Tax (“NWT”)

Distributions: Any amount paid by the private foundation to its beneficiaries qualifies as miscellaneous income, within the meaning of article 99 ITL. As such, these payments will not trigger any withholding tax. Furthermore, non-residents are not taxable in Luxembourg by reason of income derived from a Luxembourg private foundation.

Fixed registration duty upon incorporation: Endowments upon incorporation or subsequent contributions trigger a fixed registration duty of EUR 75, as for any other Luxembourg Company. The EUR 75 fixed registration duty also applies to real estate assets allocated to the foundation.

Transfer of assets while the founder is still alive: The transfer of assets owned by the foundation while the founder is still alive is regarded as a direct gift from the founder and therefore subject to general Luxembourg gift tax rules. The duty is due by the foundation. A similar principle applies in case of dissolution of the foundation, with the exception that, in this case, the duty is due by the beneficiary.

Founder’s death: At the time of the founder’s death, if the founder was resident in Luxembourg, the total assets held by the foundation will be subject to an inheritance duty. Such duty applies on the fair market value of the assets decreased by the liabilities related to the assets, at a rate of:

  • 0% on the share of the assets received by beneficiaries who would be (i) the founder’s spouse or (ii) the founder’s registered partner provided they have been married or partners for more than 3 years, or (iii) a direct ascendant or descendant of the founder;
  • 12% on the share of the assets received by beneficiaries who would be the founder’s brothers, sisters, uncles, aunts, nephews, nieces, great uncles, great aunts, great nephews, great nieces, adopted or adoptants, and their descendants and ascendants, or the founder’s mother-in-law, father-in-law, son or daughter-in-law if the founder and its spouse do not have common descendants;
  • 40% in any other cases.

If the founder was not a resident in Luxembourg, the same rates will apply under the same conditions to the fair market value of real estate assets located in Luxembourg held by the foundation, decreased by the liabilities related to these assets.

Certificates related to real estate: Issuance and sale of certificates related to Luxembourg real estate are considered for registration duty purposes as being a direct gift of the real estate.

A “step up” principle for individuals

Individuals selling shares are as a matter of principle taxable on the capital gains computed on the basis of the difference between the sale price and the acquisition price. The draft law introduces a beneficial provision for individuals that become Luxembourg resident. This provision is a general rule that applies to capital gains on shares regardless of the use of a private foundation. These are able to compute capital gains on their substantial shareholdings on the difference between the sale price and the value of the shares at the time of the transfer of residency. This provision aims at avoiding double taxation of individuals that would have been subject to an exit tax in their home country when transferring their residence to Luxembourg.

Implications

With the SPF (Société de gestion de Patrimoine Familial), wealthy families had already a dedicated vehicle. However, they will be now provided with a new vehicle with a broader purpose and different mechanisms, from a legal or a tax perspective. The mechanisms of transfer of assets to the foundation and subsequently to the beneficiaries are tailor made mechanisms for estate planning.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu.

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Financing activities: what is the right price when no advance pricing agreement has been reached with the tax authorities?

A recent decision of the Luxembourg Administrative Tribunal deals with a Luxembourg Company which granted loans to other group companies which were neither remunerated nor fully documented. The Luxembourg Tribunal ruled on whether the remuneration of a financing activity performed by a Luxembourg Company is an arm’s length remuneration, on whether there is a hidden distribution and finally under which circumstances the tax authorities are allowed to assess Luxembourg companies automatically (so-called taxation d’office).

Facts and procedure

A Luxembourg Company (Luxco) granted loans to other group companies, which were neither fully documented, nor remunerated: 1 loan to an SA, another loan to another SA and 1 loan to a French SCI. When assessing tax years 2005 to 2010, the tax authorities applied a 3,5% margin on these loans, while they had applied a margin of 0,75% when assessing tax years 2003 and 2004 (the margin had been increased by the tax authorities from 0,5 to 0,75%).

Luxco challenged the position of the tax authorities, arguing that the tax authorities should apply the same margin (i.e. 0,75%) as the one they had applied in previous tax assessments. Luxco argued further that a capital gain had been realised upon the transfer of one of these loans (loan to the French SCI) and that this capital gain corresponded to the amount of interest which should be realised in accordance with arm’s length principles, i.e. 0,5% margin for the tax years 2003 & 2004 and 0,75% margin for the tax years 2005-2010. Luxco concluded that the remuneration on this loan was in line with the arm’s length principles and that the tax authorities should not have increased its taxable basis.

Luxco added further that the French SCI had already deducted an interest charge of 0,75% in its accounts and was now no longer able to deduct additional amounts in case of a tax adjustment at the level of Luxco so that in case of adjustment, there would be a situation of double taxation.

Regarding the 2 loans to the SAs, Luxco argued that these amounts were not loans but receivables against the SAs which should not be remunerated. The amounts were however reflected as loans in the accounts of Luxco.

Decision of the Tribunal

As far as the receivables/loans to the SAs were concerned, the Tribunal considered that there was a hidden dividend distribution and since Luxco did not provide any supporting documentation or argumentation evidencing that another level of remuneration would be appropriate, the tax authorities were right in assessing Luxco automatically and considering a margin of 3,5% as appropriate. The fact that the tax authorities agreed in the past on a lower margin of 0,75% was irrelevant, given the annual nature of the tax. The only exception to this principle would be the case where a prior written agreement has been reached with the tax authorities in this respect (an indirect reference to Advance Pricing Agreements), which was not the case.

As far as the loan to the French SCI is concerned, given the facts evidenced by Luxco and the gain made on the transfer of the loan, the Tribunal disagreed with the tax authorities according to which there would be a hidden dividend distribution and considered instead that the taxable basis of the Luxco should not have been increased in this respect.

Implications

The case, which is one of the few in the area of financing activities performed by Luxembourg Companies, is interesting, as it shows that the tax authorities are getting more and more attentive to the application of arm’s length principles when Luxembourg Companies perform financing activities. The Tribunal states that the position taken in one year by the tax authorities as regards the margin is not binding upon the tax authorities for the following tax years, except if an agreement has been reached with the tax authorities (which was not the case here). The fact that the tax authorities have applied a 0,75% margin in one year and considered a 3,5% margin as appropriate in the years after is quite surprising, but we wonder whether the tax authorities would have increased the margin in the same way if Luxco had applied a margin of 0,75% instead of not applying any margin at all in the years 2005 to 2010. It is not clear how the tax authorities ended up with a margin of 3,5% while they previously considered a 0,75% margin as sufficient. The case law seems to tell us that applying a small margin is always better than not applying any margin at all and leaving it to the tax authorities to decide what is the appropriate remuneration. The lesson learned from this case-law is in any case that tax payers should always remain prudent and seek the advice of experts when defining the terms and conditions of financing transactions and determining the arm’s length price. If taxpayers want to be on the safe side, they can take the necessary steps in order to obtain an Advance Pricing Agreement from the tax authorities.

For more information about this topic, please contact Olivier Remacle at olivier [dot] remacle [at] atoz [dot] lu or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu.

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Participation exemption regime: what if the distributing entity was formerly in a foreign country?

The Luxembourg Administrative Court has rendered a decision on 7 August 2013 regarding the application of the participation exemption regime to liquidation proceeds arising from 2 Luxembourg Sàrls which were formerly (9 months before the liquidation) French SCIs. The Luxembourg tax authorities refused to exempt the liquidation proceeds received since they considered that the 12 month holding period was not met.

The participation in the French SCI had been acquired by a Luxembourg Company (Luxco 1) already 9 years before the liquidation took place but the French SCI had transferred its seat to Luxembourg and was converted into a Luxembourg Sàrl only 9 months before its liquidation took place. Luxco 1 as well was formerly a French SCI and transferred its seat to Luxembourg and was converted as well into a Luxembourg Sàrl almost at the same time.

It means that at the time of the acquisition of the participations, all companies involved (shareholder and subsidiaries) were French SCIs. They all became Luxembourg Sàrls less than 12 months preceding the liquidation.

The Luxembourg Company argued that the holding period prior to the transfer of the seat to Luxembourg had to be taken into account.

The Luxembourg Administrative Court disagreed and considered that the subsidiary did not fulfill the conditions regarding its legal form during 12 months at least but only during 9 months, so that the conditions for the participation exemption regime were not met. The Court added that the French SCIs were out of the scope of the EU parents-subsidiary Directive because they opted to be subject to tax while the Directive provides that the Company has to be subject to one of the taxes listed in Annex I, Part B, without the possibility of an option or of being exempt.

The Luxembourg Company argued that there would be a discrimination compared to the analysis made regarding 1929 holding companies for which the holding period prior to the conversion into SOPARFI is taken into account. The Court rejected this argument and considered that there would be a confusion between a change of tax regime (in the case of conversion of 1929 holding company into SOPARFI) and a change of legal form, SOPARFI and 1929 Holding companies having both a legal form which may qualify for the EU parent-subsidiary Directive.

Implications

In this case, the Administrative Court made no major findings: it merely applied the conditions of the participation exemption regime. However, the case is a good illustration of the consequences of the migration of a company. The newly created company is called to continue its existence under Luxembourg law and will therefore be called to distribute dividends, or even to be sold or liquidated. These types of income are, as a matter of principle, exempt in the hands of the Luxembourg parent under the conditions of the participation exemption regime (e.g. qualifying parent and subsidiary company, minimum threshold of shareholding, and minimum holding period requirement). However, as illustrated by this decision, the newly created Luxembourg subsidiary cannot be deemed to be ab initio a Luxembourg qualifying company by the mere reason of its migration .Therefore, in case the migrated company was not previously a qualifying participation under the participation exemption regime, particular attention has to be paid to the timing of the subsequent operations.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu.

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Stock option plans: parliamentary question provides clarifications on valuation of options

Following a parliamentary question of 8 February, Finance Minister Frieden has provided recently some details regarding the tax treatment of stock option plans, as provided in Circular 104/2 of 20 December 2012. The Circular provides that in the absence of a more precise valuation, the value of the stock option can be estimated at a value equal to 17,5% of the underlying asset. The Circular indicates however that the valuation at 17,5% can only be performed under so-called reasonable conditions/circumstances, which so far, had not been defined.

The response of Mr. Frieden reveals the details of an unpublished so-called note de service, an internal document of the tax authorities, which explains when a valuation at 17,5% will be considered as having being made under reasonable conditions/circumstances.

The note states that 3 cumulative conditions have to be met:

  • The value of the option should not represent more than 50% of the gross annual remuneration (option included). This percentage has to be computed individually, i.e. for each of the participants to the stock option plan.
  • The stock option plan can only apply to persons defined in article L 211 -27 5 of the Labour Code (i.e. cadres supérieurs)
  • The stock option plan must be such that the price of the option cannot exceed 60% of the value of the underlying security.

In case one of these criteria is not met, the valuation method Scholes & Black or a comparable valuation method will have to be used.

The response of Mr. Frieden which reveals the position applied by the tax authorities is welcome as it brings more legal certainty for tax payers who now know under which circumstances they can or cannot value an option at 17,5%. Before this position became public, there was some legal uncertainty for tax payers who did not know whether the valuation would be considered as acceptable. It is therefore important that this has now been clarified.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu.

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Update on Luxembourg exchange of information case-law

Exchange of information upon request - case law summary

Exchange of information (EOI) procedures provide fuel for litigation. Taxpayers do not hesitate to challenge the condition of foreseeable relevance before courts, which issue an increasing number of decisions. Several decisions were published this summer, for which we have outlined the following issues:

1) Does a request meet the condition of foreseeable relevance when based on facts occurring or documents issued prior to the period under investigation?

2) Does a request meet the condition of foreseeable relevance when it is aimed at supporting a fiscal investigation notified as closed to the taxpayer under investigation?

3) Is the taxpayer entitled to have access to the request from the foreign tax authorities or does it constitute privileged information?

1) Does a request meet the condition of foreseeable relevance when based on facts occurring or documents issued prior to the period under investigation? (Cour administrative, CA 4 September 2013, n°33112C, n°33111C).

A Luxembourg bank was requested by the Luxembourg tax authorities to provide information on a designated bank account and its holder. The injunction procedure was launched after the French tax authorities issued an exchange of information request (EOIR). A document dated 2006, found in the course of investigations made in 2011, raised the suspicion of the French tax authorities that a French taxpayer was hiding the existence a Luxembourg bank account. The EOIR was issued for the purpose of controlling and taxing the years 2011 and 2012. The taxpayer seized Luxembourg courts and challenged the validity of the injunction. The discussions revolved around the condition of foreseeable relevance, the taxpayer considering the EOIR as a fishing expedition.

The taxpayer, a sales representative who stopped his activities in 2010, was subject to two tax audit procedures: 2010/2011 and 2008/2009. According to the taxpayer, the French tax authorities had no interest in collecting information for 2010/2011 to the extent he stopped his activities at that time. He therefore argued that that the real intention of the French tax authorities was to collect information for the 2008/2009 tax audit instead of the 2010/2011. He further argued that, even if the intention of the French tax authorities was to collect information for 2010/11, the document that caused the EOIR was dated 2006, a tax year in respect of which no exchange of information request could be made, given that the new EOI provisions of the France-Luxembourg Double tax Treaty (DTT) only apply as from tax year 2010. The answer of Luxembourg courts was very clear: the fact that the taxpayer stopped its sales representative activities has no incidence: the French tax authorities are entitled to ask for information about the bank account despite the termination of the activities as the termination does not prevent the taxpayer from deriving subsequent income from the activity that ceased. Further, to the extent the French tax authorities made clear that the information requested was limited to the taxation of 2010/2011, the date of the document that evidenced the existence of the bank account had no incidence. 

2) Does a request meet the condition of foreseeable relevance when it is aimed at supporting a fiscal investigation notified as closed to the taxpayer under investigation?

This case also involves French taxpayer and authorities. The usual conditions for the EOIR to be considered as valid seemed to be met at first sight: the EOIR designated a specific taxpayer, its Luxembourg bank account, the tax years under investigation and specified that its purpose was to collect information about the income derived by the French taxpayer from its Luxembourg bank account.

Once again, the discussions went on the condition of the foreseeable relevance. The EOIR was supporting a specific form of fiscal investigation (so called examen de situation fiscale personnelle, ESFP) which was notified as closed to the taxpayer shortly after the issuance of the EOIR. The taxpayer argued that in the absence of investigation, the EOIR had ceased to be foreseeably relevant for the purpose of French taxation.

The issue was brought before Luxembourg courts. The court stated the principle: as long as an EOIR refers to a specific fiscal investigation, the requested authorities need to check if this investigation is still open to appreciate the foreseeable relevance of the EOIR (CA 4 September 2013, n°33082C). This implies that the requested tax authorities may be called to check if the continuation of the procedure of EOI complies with the law of the requesting State.

In the case at hand, Luxembourg courts examined the French tax procedural provisions. They noted the existence of a general principle that prohibits new tax adjustments once the investigation has been closed. Luxembourg courts went further in the analysis. They examined every exception to the general rule and transposed it to the specific situation. They concluded that none of the conditions to these exceptions were met, which implied that the general rule had to be applied. The EOIR ceased to be relevant due to the termination of the French fiscal investigation.

3) Is the taxpayer entitled to have access to the request from the foreign tax authorities or does it constitute privileged information? (TA 8 juillet 2013, n°32600)

This case deals with a procedural issue: is the EOIR issued by foreign tax authorities privileged information or should the taxpayer be allowed to have access to it?

The issue comes from the wording of the EOI clause of the DTT (France-Luxembourg in the case at hands). This kind of clause provides that any information under an EOI procedure has to be treated as secret. However, and as reminded by Luxembourg courts, the clause provides for some exceptions and allows the disclosure of information and of the EOIR to a limited circle of persons, including the taxpayer.

The Luxembourg courts further consider that, in application of Luxembourg procedural rules, the registry of court has to forward the EOIR to the plaintiff if he is the taxpayer under investigation. In that case, the State representative has to file the EOIR to the registry of court and cannot invoke the secrecy principle as stated in the relevant DTT.

Implications

The abundant case law in relation with EOI matters reveal how intricate these questions are. To date, all the procedures were initiated within the context of double tax treaties. To the extent the Directive 2011/16/EU on administrative cooperation was ratified in Luxembourg earlier this year, we can expect to read more and more case law, issued also in a EU context.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu.

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Banking sector - VAT - The European Court of Justice rules on the computation of a “global” pro rata in the recent Credit Lyonnais Case (C-388/11)

The Crédit Lyonnais case (C-388/11) was an opportunity for the European Court of Justice to rule on the computation of the input VAT deduction right of a bank which has branches established in other EU Member States and outside the European Union.

The question was whether the principal establishment should take into account the turnover realised by its branches located in and outside the EU for the computation of its VAT deduction right.

Following the AG opinion, the Court decided that a taxable person cannot take into account the turnover carried out by its branches both established in other Member States and in third states in order to determine the VAT deduction right of its principal establishment.

The Court added that Member States are not allowed to adopt a rule for the computation of the VAT deduction right per sector of business of a company which authorises that company to take into account the turnover realised by a branch established in another Member State or in a third State. The ECJ judges specified that the notion of “sectors of business” does not refer to geographic areas but to different forms of economic activities.

This decision was unfortunately somehow foreseeable. One of the argument used is that, should a global pro rata be allowed, it would be distorted since there could be an increase of the VAT deduction right of the principal establishment for all the acquisitions made whereas certain acquisitions have no connection with the activities of the fixed establishment.

Although this decision is rather negative, the Court referred to the FCE Bank case (C-210/04). This case should be remembered, as it clarified that “a fixed establishment, which is not a legal entity distinct from the company of which it forms part, established in another Member State and to which the company supplies services, should not be treated as a taxable person by reason of the costs imputed to it in respect of those supplies”. This implies that transactions between a head office and its branches are out of the scope of VAT.

As a consequence of these two case laws, banks having branches located abroad should perform a review of the method they use to compute their input VAT deduction right as well as a VAT review of the flows of incoming services. It is time to evaluate the risks and the opportunities for improvement.

For more information about this topic, please contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu ().

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ATOZ NEWS

Taxand Global Survey - Taxand the CFO

We’re delighted to invite our clients and contacts to take part in this research. The key benefit of participating is that aggregated results with Taxand opinion will be provided to respondents in advance, sharing a cross-sector global overview of strategic priorities and topical tax issues.

The survey is designed to evaluate your feedback in 5 key areas:

  • Reputation – understanding how the recent media and political focus on international tax issues is impacting multinationals’ market reputation and as a result, tax policies
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  • Scrutiny – assessing the impact of increasing scrutiny and cross-border cooperation on multinationals’ relationships with tax authorities
  • Harmonisation & Transparency – a measure of steps being taken worldwide to effect greater transparency and whether harmonisation is realistic across borders
  • Competitiveness – understanding the impact of country competitiveness and OECD & UN tax proposals on multinationals’ business activities globally

We conduct this survey on a yearly basis, feel free to submit your completed questionnaires by 11 October 2013 by clicking here - many thanks in advance for your participation !

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International Taxation Breakfast in Helsinki

Attorneys at law Borenius together with an independent Luxembourg tax and advisory firm, Atoz, and Vistra, a provider of trust, corporate and fund services in Luxembourg, welcome you to a breakfast seminar on international taxation. The seminar will be held on Tuesday 22 October at Ekberg Extra, Bulevardi 9 A, 2nd floor, Helsinki

Today, cross-border investments and business activities are commonplace across business and industry lines. Tax authorities’ recent focus on cross-border structures combined with the multitude of EU and domestic tax legislation however stresses the importance of careful tax planning.

Case examples of this are transfers of IPR and transfer pricing in general. While a carefully designed and managed transfer pricing regime, abiding to the statutory laws of the countries involved enables cost optimization, tax authorities’ response may result in significant non-recoverable international double taxation. As the value of especially IPRs continues to increase, monetary loss of such actions may be expected to be magnified.

Since the nature of the issue is complex and day-to-day questions abound, we hope you voice your concerns in advance. In connection with the registration, you may write down your questions for the speakers.

For additional information, please contact Ms Tarja Tikkanen tel. +358 9 6153 3421 or tarja [dot] tikkanen [at] borenius [dot] com ()

Seminar programme & registration.

The seminar is free of charge, however, the number of participants is limited.

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ATOZ Chair for European & International Taxation

The ATOZ Chair for European and International Taxation at the University of Luxembourg and the University of Linz are delighted to invite you to a Conference on: Landmark decisions in direct tax jurisprudence on January 23rd, 2014.

This conference will explore the history, impact, and potential for further development of the CJEU’s and the EFTA Court’s landmark decisions relating to direct taxation. The presentations, to be delivered by leading practitioners and academics in the field, will explain the background, legal framework, and arguments leading up to the various decisions as well as their impact on subsequent Court decisions. Attention will be paid to the Court’s initial reasoning and any shading or nuancing thereof in the case law built thereon. Moreover, each presentation will explore the strengths and weaknesses of the Courts’ reasoning and potential developments. Finally, additional commentary will be offered by current or former CJEU and EFTA Court Judges, Advocates General, members of the EU Commission, and members of domestic courts.

For upcoming events and additional information about the ATOZ Chair for European and International Taxation, visit the ATOZ Chair.

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TAXAND NEWS

For the latest edition of Taxand’s Take, your regular update on the topical tax issues affecting multinationals, please click here.