Key takeaways
On 21 November 2024, the Luxembourg Higher Administrative Court (Cour administrative) handed down a decision regarding the acquisition value and the acquisition date to be ascribed to shares received by way of donation. This was particularly relevant in the context of the computation of liquidation proceeds in the present case.
Facts of the case
Mr. and Mrs. A received, free of charge by way of a donation from their daughter Mrs. A2, the shares in the Company B in December 2016. The shares in Company B were originally subscribed, in July 2016, by Mrs. A2 through a contribution in cash and a contribution-in-kind of shares in the Company C (which were themselves acquired by Mrs. A2 in 2014) (the "C Shares Contribution"). Mrs. A2 was tax-resident in Switzerland at the time of the incorporation of Company B.
In 2019, Company B was liquidated under the ownership of Mr. and Mrs. A resulting in the distribution of liquidation proceeds (the "Liquidation Proceeds"). Following an audit, the Direct Tax Authorities (Administration des contributions directes) (“DTA”) issued a letter informing the two Luxembourg taxpayers that the DTA intended to reassess their joint income tax return on the grounds that the Liquidation Proceeds constitute taxable “miscellaneous revenues” in the spouses’ hands (the "Rectifying Tax Assessment"). The spouses filed a claim against the Rectifying Tax Assessment whereby they provided a valuation report (issued ex post) evidencing that the amount of the Liquidation Proceeds should be reduced by the value of the Company B at its incorporation resulting into a tax loss into the hands of the spouses as such a historical value of Company B’s shares should be effectively higher than the receipt of the Liquidation Proceeds. More particularly, the applicants argued that the historical cost of Company B’s shares subscribed by their daughter should coincide with the fair market value of the Company C’s shares as determined at the date of the C-Shares Contribution and thus evidenced by the ex-post valuation report provided by the spouses. Nonetheless, neither the DTA nor the Lower Administrative Court (Tribunal administratif) recognised the characterisation of a tax loss into the hands of the spouses upon the receipt of the Liquidation Proceeds, the spouses therefore had to file an appeal before the Higher Administrative Court.
Decision of the Higher Administrative Court (Cour administrative)
Acquisition cost of the Company B’s share determined by the Higher Administrative Court
The acquisition cost of a participation representing the share capital of the company B, acquired by Mr. & Mrs. A free of charge by way of a donation should coincide with the acquisition priced paid by the previous holder who last acquired the property against consideration (art. 100 and 102 (3) of the Luxembourg Income Tax Law (the "LITL"). On this point, the Higher Administrative Court confirmed that the historical date of acquisition and historical acquisition values of the shares in the Company B to be recognized into the hands of Mr. & Mrs. A should stem from the acquisition date and acquisition values at which their daughter subscribed for shares in the Company B in exchange of the C-Shares Contribution. According to the Higher Administrative Court, such a share-for-share exchange should in principle be performed at its estimated disposal value (valeur estimée de réalisation) considering that none of the conditions for the application of the tax-neutral share-for-share exchange regime were met in the case at hand.
Determination of the estimated disposal value of the shares held by Mrs. A2 in the Company B
The Higher Administrative Court reminds that the estimated disposal value should coincide with the value that should “be obtained during a normal and freely consented alienation of the carefully considered taking into account all circumstances and conditions affecting the price, except for abnormal or personal circumstances and conditions”. In order to identify said value, the Higher Administrative Court assessed the value retained for the purposes of the C-Shares Contribution for which a valuation report had been prepared by an independent auditor at the time of the transaction. In particular, such historical valuation report evidenced that the fair market value of Company C’s shares should at least equal the issuing value of the Company B’s shares.
In the absence of any other supporting documentation sustaining a different fair market value embedded into Company C’s shares from the contributor’s perspective (Mrs. A2) at the time of the C-Share Contribution, the Higher Administrative Court therefore considered that the subscription price of the shares issued by Company B attributed to Mrs. A2 (upon the C-Shares Contribution) should be regarded as the initial acquisition cost of Company B’s shares held by Mrs. A2. Indeed, and as per the Court’s argumentation, such a subscription value should be regarded as the “price to be considered as the one determined by the parties in the context of the normal and freely consented alienation of the contemplated property.” Therefore, this same acquisition value should be fiscally attributed to Mr. & Mrs. A by reason of their acquisition of Company B’s shares by way of donation.
As a result of all the above, the Higher Administrative Court ruled that both the DTA and the Lower Administrative Court retained the correct valuation method pertaining to the historical cost of the shares held in Company B by Mr. & Mrs. A and thus confirming the realisation of a taxable profit i.e., the Liquidation Proceeds, upon the dissolution of the Company B rather than a tax loss.
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