Contributions to 115 account are not part of the acquisition price of a participation says Luxembourg Administrative Court - Impact on participation exemption regime

Background of the case 

In 2014, a Luxembourg company (Parent LuxCo) acquired a participation of 4.37% in another Luxembourg entity (Sub LuxCo). On the same day, Parent LuxCo made a contribution to the 115 account of Sub LuxCo under a separate contribution agreement (said contribution to the 115 account allowed to reach an investment of at least EUR 1.2 million in Sub LuxCo). 

In 2016, Sub LuxCo made a dividend distribution to Parent LuxCo applying 15% withholding tax (WHT). 

Parent LuxCo then claimed the refund of said WHT on the ground that the conditions of the Luxembourg participation exemption regime (i.e. article 147 LITL) were met. While the 10% ownership condition was not fulfilled, the alternative condition requiring a minimum acquisition price of EUR 1.2 million was considered fulfilled by the company as a result of the additional amount contributed to the 115 account of Sub LuxCo. In other words, the taxpayer considered that the acquisition price of the shares in Sub LuxCo for the purposes of the application of the participation exemption for WHT comprised not only the amount paid in consideration for the shares but also the amount contributed to Sub LuxCo via its 115 account.

To come to such a conclusion, the taxpayer notably argued that all contributions of whatever nature (i.e. including formal contributions such as share capital and share premium but also informal capital contributions) have to be taken into account when determining the acquisition price of a participation for the condition of the participation exemption regime. In that respect, since the chart of accounts recognises the existence of contributions to the capital without issuance of shares via the 115 account, expenses increasing the latter should be seen as a component to also be taken into account in the determination of the acquisition price of a participation. The taxpayer referred in its argumentation to the notion of "effective acquisition price" in the meaning of article 25 LITL which would include all incidental expenses to be added to the purchase price (including therefore 115 account contributions). 

The tax authorities refused to consider the condition of the minimum acquisition price met in this case for the application of the Luxembourg participation exemption regime. They consider that the subsequent contribution in the 115 account cannot be assimilated to a classical share premium but rather that it corresponds to an informal contribution without receipt of shares constitutive of the share capital of the company. Consequently, the tax authorities considered that this contribution of funds by Top LuxCo cannot be qualified as constitutive of a direct participation in the share capital of Sub LuxCo. 

In May 2021, the Administrative Tribunal confirmed the position of the tax authorities and indicated that, even if contributions to the 115 account may be constitutive of the "effective acquisition price" of the shares, this was not relevant, as article 147 LITL only refers to the notion of acquisition price. In the case at hand, the Administrative Tribunal noted that no element has been provided to support that the 115 contribution has served for the acquisition of Sub LuxCo shares.

Decision of the Administrative Court

The Administrative Court, in its decision dated 31 March 2022, somehow surprisingly upheld the judgement of the Administrative Tribunal by confirming that there is no sufficient link between the 115 account and the share capital to take into consideration the 115 account contribution for the purposes of the determination of the EUR 1.2 million minimum acquisition price condition for the application of article 147 LITL in the case at hand. 

More precisely, the Administrative Court mentioned that article 147 LITL uses the same criteria of the direct participation in the share capital of the subsidiary as article 166 LITL (exemption of dividends received by a Luxembourg fully taxable company under certain conditions) and the same principles of interpretation should therefore be  applicable in relation to both legal provisions. The Administrative Court then noted that said articles are issued from the Parent-Subsidiary Directive and it then also referred to a case law of the Court of Justice of the European Union whereby the notion of participation in the capital was construed by reference to the legal relationship between the parent company and its subsidiary. On this basis, the Administrative Court argued that the notion of participation in the share capital within the meaning of article 147 LITL covers only the holding of shares in the share capital of the subsidiary since only those shares materialise the direct legal relationship with the subsidiary entitling the parent company with the inherent rights of a shareholder.

The Administrative Court further explained that the notion of acquisition price has to be interpreted as per article 25 LITL whereby the acquisition price of an asset is to be understood as all the expenses incurred by the purchaser to place such asset in its condition at the time of the valuation, meaning that all the incidental expenses incurred should be added to the acquisition price. However, it is argued that an expense can only be considered for measuring the acquisition price of a participation in the share capital of the subsidiary if such an expense increases the number of shares or the nominal value of the shares or is a direct accessory linked to such an increase. 

Also, according to the Administrative Court, although contributions to the capital of a subsidiary via the 115 account should be seen as an equity component, they may not be considered as being part of its share capital, which consequently, does not confer to its shareholder any counterpart such as new shares or increase of the nominal value of the existing shares. As such, the Administrative Court is of the view that there was, in the case, no sufficient link between the 115 account and the share capital of a subsidiary to consider the contribution into 115 account as increasing the acquisition price of the participation. 

The decision adds that the bylaws of Sub LuxCo did not provide that the amount contributed by its parent company into the 115 account would be exclusively allocated to the latter, in particular in case of reimbursement of said contribution, so that the proportion in which such a contribution would have increased the nominal value of the participation held by Parent LuxCo, as opposed to that of the other shareholders, could not be determined.