Key Takeaways
On 6 February 2024, the Luxembourg Higher Administrative Court denied the benefits of the Luxembourg participation exemption to participations which had been lent by a Luxembourg-resident capital company to third-parties as “créances-titres”.
Facts at hand
In the case at hand, a resident parent company (the “Company”) lent participations held into subsidiaries’ capital, and which initially qualified for the purposes of the application of the local participation exemption, (the “Participations”) to several third-parties (the “Borrowers”) as “contrats de prêt de titres” (the “Debt Securities”). Part of the Participations were listed on stock exchanges.
By virtue of its status of lender of the Debt Securities, the Company was remunerated by way of interests, commissions or retrocessions of dividends derived by the Borrowers from the Participations. However, the Luxembourg tax authorities (the “LTA”) considered, according to the facts of the case, that the Debt Securities should not qualify for the purposes of the application of the Luxembourg participation exemption at the level of the lender, i.e. the Company, which resulted into the qualification of (i) the remuneration received by the Company from the Debt Securities as fully taxable income from a corporate income tax/municipal business tax, and (ii) the receivable depicting the lent Debt Securities as non-exempt assets for net wealth tax (“NWT”) purposes. At first instance, the Lower Administrative Tribunal agreed with the LTA that the Debt Securities should not qualify for the benefits of the Luxembourg participation exemption considering that the Company was no longer entitled to both the legal and economic ownerships of the Participations by virtue of the terms of the “contrats de prêt de titres”.
Higher Administrative Court’s findings
Legal ownership of the Participations
The Higher Administrative Court concluded, in light of the terms of the Debt Securities’ agreements, that some of the Debt Securities had the features (i.e., fungibility of the securities to be returned or retroceded, remuneration to be paid to the Company by the Borrowers, etc.) of “consumer credits” and not “loans for use” from a Luxembourg civil law point of view, having the effects of transferring to the respective Borrowers, for the entire duration of the Debt Securities, the legal ownership of the underlying assets, i.e., the Participations.
Economic ownership of the Participations
The Higher Administrative Court also assessed whether the Company could still invoke the benefits of the Luxembourg participation exemption in the light of the economic ownership approach as provided by §11 of the Steueranpassungsgesetz (meaning whether the Company is treated as still being entitled to the economic rights related to the Participations from a strict tax perspective regardless of any legal ownership transfer carried-out by reasons of the “contrats de prêt de titres”).
In the case in point, the Debt Securities’ agreements entered into by the Company provided for the payment of compensation by the Borrowers in relation to the dividends generated by the Debt Securities, as well as, in certain circumstances, the termination of the “contrats de prêt de titres” leading to an earlier date for the return of the Debt Securities. In addition, the Company asserted that these Debt Securities’ agreements had not been entered into with a view to obtaining a tax advantage (but for the purpose of generating additional income). In addition, some of the Debt Securities’ agreements enabled the Borrowers to benefit from market fluctuations in the share price of some of the listed Participations. Finally, Borrowers benefited from staggered loan durations, and could freely dispose of the Debt Securities until the loans matured.
In view of the foregoing, the Higher Administrative Court concluded that the the Lower Administrative Tribunal judges were right to find that the Borrowers also benefited from the economic ownership (on top of the legal ownership) of the Debt Securities. Consequently, the Company was not entitled to the benefits of the Luxembourg participation exemption with respect to said assets.
Valuation of the Debt Securities into the hands of the Company for NWT
The Higher Administrative Court recalled the principle of evaluating debts at their estimated realization value within the meaning of §10 (1) of Bewertungsgesetz (“BewG”). In addition, § 10 (2) BewG then defines the estimated realizable value as being the price, which in the normal course of business, would be obtained in the event of sale of the economic asset, taking into account the nature of said asset, and specifies that it is necessary to take into account all circumstances which influence the Participations’ value.
In this case, the Debt Securities related to listed shares so that their realizable value, according to the Higher Administrative Court, could be determined based on their stock market prices (and not based on the Debt Securities’ nominal value as argued by the Company). Indeed, the Court considered that the stock price should be considered as a floor value for determining the unitary value of the Company for NWT purposes.
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