Case-Law on the Concept of Serious Economic Reasons in the Context of Share Capital Reductions

While under Luxembourg tax law dividend distributions are subject to withholding tax, share capital reductions are out-of-scope provided that (i) no distributable reserves are available, which would be deemed to be distributed firstly and that (ii) the share capital reduction is motivated by serious economic reasons. The lower administrative court (tribunal administratif), in a decision dated March 26^th 2019, had to decide whether a share capital reduction undertaken by a taxpayer was motivated by serious economic reasons, in order to decide whether said reduction should not be subject to Luxembourg withholding taxes.

In the present case, a Luxembourg limited liability company, whose corporate object was to develop real estate projects, undertook a share capital reduction after its last two development projects were finalised. The company was subsequently liquidated a year later. At the time of the share capital reduction, the sole assets held by the company were cash and a non-constructible land plot, which was left over from a previous development project and which could not be sold. The company had no intention to continue its activities and could not distribute the cash it held due to the lack of distributable reserves caused by previously suffered losses. A capital reduction was thus the sole possibility, from a corporate law perspective, to return the cash to the shareholders.

The lower administrative court ruled that the share capital reduction was motivated by serious economic reasons, as the company did not want to carry on any further development projects, which was corroborated by the liquidation of the company a year later, keeping in mind that liquidation proceeds are not subject to withholding taxes in Luxembourg. While the lower administrative court did not provide for a clear definition of the concept of serious economic reasons in its decision, since it appreciated the situation in concreto, based on the fact and activities carried out by the company, it is, to the best of our knowledge, the first case-law to cover this topic. The acceptance by the lower administrative court of the reduction of the activity of a taxpayer, without an immediate liquidation, as an example of serious economic reasons, provided that it is evidenced by conclusive supporting documentation, is welcome guidance.