On 19 July 2024, Luxembourg direct tax authorities issued circular L.I.R. n° 170/1, 170bis/1, I.C.C. n° 44, I.Fort. n° 55 (the “Circular”) clarifying the Luxembourg tax treatment of the dissolution without liquidation under art. 1865bis of the Civil Code (also called in practice simplified liquidation or “transfert universel de patrimoine”).
The Circular notably clarifies that for Luxembourg tax purposes, (i) the operation is governed by the rules applicable to mergers, thus being assimilated to a liquidation unless the relevant conditions are met to benefit from the tax neutral merger regime (domestic and cross-border) and (ii) the shareholder can continue any net wealth tax immunization reserve existing at the level of the dissolved company.
Dissolution without liquidation under article 1865bis of the Civil Code
The dissolution without liquidation also called simplified liquidation in practice, has been introduced in 2016 notably to provide a faster dissolution route for companies with a single shareholder. Under art. 1865bis of the Civil Code, where a Luxembourg company has a single shareholder and is up to date with its tax and social security payments, the shareholder can through a single notary deed resolve the dissolution of the company which triggers (i) the immediate dissolution of the company and radiation from the trade and companies register and (ii) the immediate transfer of all assets and liabilities to the shareholder.
The provisions of the Circular are exclusively applicable to operations taking place under art. 1865bis of the Civil Code excluding dissolutions with liquidation which are subject to the standard tax rules governing liquidation.
Precisions of the Circular
Corporate income tax and municipal business tax
The dissolution without liquidation under art. 1865bis of the Civil Code producing the same legal effects as the transactions subject to the mergers tax rules, the Circular clarifies that the operation is subject to the same provisions.
As a principle, the dissolution without liquidation will be treated as a liquidation, resulting in the immediate taxation of any unrealized/latent gains (subject existing exemptions) and where relevant conditions are met, the operation can benefit from the tax neutral regime available for domestic and cross-border mergers (i.e., involving an EU/EEA country).
Net wealth tax special reserve
Luxembourg companies have the possibility to allocate part of the previous year profits or available reserves to a special net wealth tax reserve to reduce, totally or partially, their net wealth tax (“NWT”) liability within the double limitation that (i) the NWT reduction cannot exceed previous year’s corporate income tax liability and (ii) the reduced NWT liability cannot be below the applicable minimum NWT.
For a company whose financial year matches the civil year, the NWT liability for year N is determined as at 01/01/N based on financial statements as at 31/12/N-1, the reduction is requested in year N-1 tax returns and the special reserve must be booked at the latest in the financial statements as at 31/12/N (in practice upon allocating N-1 result) and be maintained for five years.
In the specific context of a dissolution without liquidation, the Circular clarifies that (i) for the year of dissolution, the special reserve must be set up at the latest upon the dissolution to be considered as constituted before the end of the financial year and (ii) the shareholder can continue the special reserve without interrupting the five-year period.
With respect to other liquidations, the Circular recalls that the special reserve cannot be continued after the closing of the liquidation.
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