On 25th April 204, the Luxembourg Higher Administrative Court handed down a judgment (48917c) regarding the right to carry-forward tax losses for Luxembourg companies.
In the case at hand, a company which had previously engaged in a holding activity and generated tax losses, acquired and sold a real estate asset which generated a significant capital gain in 2014. The company sought to reduce its taxable profit by utilising those carried forward tax losses.
The Luxembourg Tax Administration (“LTA”) rejected the tax losses arguing that the transaction was abusive. The LTA noted that the company has been “dormant” from 2009 to 2013 and had previously engaged in a holding activity. The LTA took the view that the beneficial owner of the company should have make the real estate transaction himself rather than through the company.
First of all, the Higher Administrative Court recalls that in accordance with the Article 114 of the Luxembourg Income Tax Law (“LITL”) the tax losses attach to the legal personality of the company and may be deducted indefinitely for tax losses generated prior to 1 January 2017, and for a period of up to 17 years after 1 January 2017.
The Higher Administrative Court noted that an abuse of law may be demonstrated where the criteria of legal and fiscal personality of the taxpayer is used for the sole purpose of circumventing this requirement and the resulting prohibition on transferring the said losses, for the sole purpose of using the losses carried forward in order to avoid taxation of the related profits.
The Higher Administrative Court found that the case did not meet the criteria of abuse. The Higher Administrative Court noted in particular:
- the company’s ownership had not changed since its incorporation – thus excluding the application of the Mantelkauf theory;
- tax losses may continue to be utilised even if the company has ceased its economic activity or profession in so far as the conditions of Article 114 of the LITL are met. Thus, a company which has generated tax losses from one activity, is entitled to cease this activity and start another which could generate profits.
In the case at hand, the change from a holding activity to real estate activity could not be viewed as an inappropriate use of legal forms. The Court went further and recalled that a taxpayer is entitled to carry out a transaction though a tax opaque company rather than in his private capacity since the taxpayer is still allowed to enjoy the choice of the least taxed route provided that he does not carry out transactions with the sole aim of benefiting himself or causing others to benefit from tax advantages that the legislator did not intend to grant in the circumstances created by the said person directly or through an opaque company.
Thus, the Higher Administrative Court concluded that in the absence of an inappropriate use of legal forms, the transaction cannot be regarded as abusive.
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