Key takeaways
In a decision (no. 50199C), dated 17 July 2024 the Higher Administrative Court (Cour administrative) upheld a decision by the Director of the Luxembourg tax authorities (“LTA”), who in a specific case denied the valuation of convertible bonds issued by a Luxembourg tax-resident company at their fair market value for Net Wealth Tax purposes.
Facts of the case
In the case at hand, the LTA decided to deviate from the plaintiff’s corporate tax return (i.e., a tax resident capital company “LuxCo”) by valuating securities receivables, mainly composed of residual quantum of stocks in Company B’s ownership, held by LuxCo (the “Securities”) at their respective fair market value (“FMV”) rather than their nominal value for NWT purposes.
The plaintiff consequently claimed that the corresponding convertible bonds financing said Securities (“Convertible Bonds”) should be symmetrically estimated at their FMV by virtue of § 14 of the Luxembourg valuation law (the “BewG”) and for the purposes of the determination of LuxCo’s unitary value. The valuation method of the Convertible Bonds particularly mattered in this instance since the Securities would not qualify for the purposes of any Net Wealth Tax (“NWT”) exemption as per Lux domestic rules and therefore end up fully taxable at 0.5%.
As a reminder, Luxembourg levies an annual NWT at 0.5% based on the unitary value determined (“UV ”) in accordance with the NWT law and the valuation law. The UV corresponds to the difference between the assets generally estimated at their nominal value (subject to certain exceptions) and the liabilities (as of January 1 of each year). § 14 BewG provides that debt claims are recorded at their nominal value, unless special circumstances (“besondere Umstände”) justify a higher or lower value for the purposes of a taxpayer’s UV.
In this instance, the terms of the Convertible Bonds would provide for various wind-up options:
- the Convertible Bonds may either be converted into shares to be issued by the LuxCo at FMV,
- bought back by company itself or,
- sold to a third party.
The plaintiff notably argued that the Convertible Bonds should be similarly valued at their FMV since the terms of the Convertible Bonds would embed the option of converting said debt into equity at FMV, and said debt would symmetrically finance assets recorded at FMV for NWT.
More particularly, the plaintiff relied on the judgment of the Lower Administrative Court (Tribunal administratif) of 15 March 2000 no. 11226 (the “2000 TA Ruling”) that defined the special circumstances under which bonds can be recorded at a value higher than their nominal value in the context of determining a Luxembourg taxpayer’s UV.
Outcome of Higher Administrative Court’s ruling
However, the Higher Administrative Court ruled that both of the LTA and the Administrative Tribunal did retain the correct valuation method pertaining to the Convertible Bonds) based on the following arguments.
Lack of linkage between bonds and assets
The alleged linkage between the value of the Convertible Bonds, the plaintiff’s shares and the Company B’s stocks, is not apparent neither from the Convertible Bond’s terms, nor from the key dates relevant for the determination of the plaintiff’s UV, so that no special circumstances (“besondere Umstände”) justify a valuation at FMV, by derogation from § 14 BewG.
Amendments of annual accounts
The amendments of the plaintiff’s annual accounts for the accounting years subsequent to the fiscal years in scope of the litigation by booking the entry of a provision to prevent any potential losses to be incurred upon future conversion at FMV of the Convertible Bonds do not sufficiently evidence the upcoming intention of LuxCo to proceed with a conversion of its debt payables at FMV.
Inapplicability of 2000 TA Ruling
The 2000 TA Ruling cannot be transposed to the present case, given that the situation that existed at the time was fundamentally different from the case at hand i.e., the bonds (i.e., covered by the 2000 TA Ruling) were assets held by the plaintiff and not liabilities, which were listed on a foreign stock exchange and therefore embed with liquidity features, so that the consequences thereof for their value constituted special circumstances that would justify a valuation method that diverged from the general principle of valuation at nominal value for NWT purposes.
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