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Court rules on participation exemption regime case


The Luxembourg Administrative Court has rendered a decision regarding the application of the participation exemption regime to liquidation proceeds arising from 2 Luxembourg Sarls which were formerly French SCIs. Taxand Luxembourg discusses the impact of this ruling on multinationals.

The participation in the French SCI had been acquired by a Luxembourg Company (Luxco 1) 9 years before the liquidation took place but the French SCI had transferred its seat to Luxembourg and was converted into a Luxembourg Sarl only 9 months before its liquidation took place. Luxco 1 was formerly a French SCI but had transferred its seat to Luxembourg and was also converted into a Luxembourg Sarl almost at the same time.

This means that at the time of the acquisition of the participations, all companies involved (shareholder and subsidiaries) were French SCIs. They all became Luxembourg Sarls less than 12 months preceding the liquidation.

The Luxembourg company argued that the holding period prior to the transfer of the seat to Luxembourg had to be taken into account.

The Luxembourg Administrative Court disagreed and considered that the subsidiary did not fulfill the conditions regarding its legal form during the required 12 months and therefore the conditions for the participation exemption regime were not met. The Court added that the French SCIs were out of the scope of the EU Parent-Subsidiary Directive because they opted to be subject to tax. The Directive provides that the company has to be subject to one of the taxes listed in Annex I, Part B, without the possibility of an option or of being exempt.

The Luxembourg company argued that there would be a discrimination compared to the analysis made regarding 1929 holding companies for which the holding period prior to the conversion into SOPARFI is taken into account. The Court rejected this argument and considered that there would be confusion between a change of tax regime (in the case of conversion of 1929 holding company into SOPARFI) and a change of legal form - SOPARFI and 1929 Holding companies having both a legal form which may qualify for the EU Parent-Subsidiary Directive.

Discover more: Participation exemption regime - what if the distributing entity was formerly in a foreign country?

Your Taxand contact for further queries is:
Keith O'Donnell
T. +352 26 940 257

Also republished in Thomson Reuters' Taxnet Pro, 24 October 2013

Taxand's Take

In this case, the Administrative Court made no major findings: it merely applied the conditions of the participation exemption regime. However, the case is a good illustration of the consequences of the migration of a company. The newly created company is called to continue its existence under Luxembourg law and will therefore be called to distribute dividends, or even to be sold or liquidated. These types of income are, as a matter of principle, exempt in the hands of the Luxembourg parent under the conditions of the participation exemption regime (eg qualifying parent and subsidiary company, minimum threshold of shareholding, and minimum holding period requirement).

However, as illustrated by this decision, the newly created Luxembourg subsidiary cannot be deemed to be a Luxembourg qualifying company by the mere reason of its migration. Therefore, in the case the migrated company was not previously a qualifying participation under the participation exemption regime, particular attention has to be paid to the timing of the subsequent operations.

Taxand's Take Author

Keith O'Donnell
Taxand Board member & Taxand global real estate tax service line leader