Agefi Luxembourg - avril 2025

By Emilien LEBAS, Partner, Head of International Tax, Tax controversy&dispute resolution leader& ValentinePLATEAU,Manager,InternationalTax, KPMGLuxembourg O n 26 February 2025, the Luxembourg administrative tribunal (Tribunal admi- nistratif, 26 février 2025, n° 47358) (the “administrative Tribunal” or the “Tribu- nal”) had to rule onwhether a loan should be requalified as hidden capital contribution andwhether interest expenses deriving from it should be consi- dered as non-tax deductible. Summary of the case On20October 2020, theLuxembourg taxauthorities (“ LTA ”) challenged the 2017 tax returnof a taxpayer regarding a loan payable, considering that interest expenses accruing on such loan should not be tax deductible. It should be noted that in the case at stake the taxpayer is part of a fiscal unity as an inte- grated entity. The situation at issue was quite specific and may be summarized as follows. - On 31 July 2014, a loan (“ the Loan ”) was granted to atransparentcompany(i.e.underthelegalformofan SCI, société civile immobilière ) (the “ transparent entity ” or“ theSCI ”)byanaffiliatedundertaking(the“ Initial Lender ”) to enable the former to refund its share- holder current account. Its shareholderswerenatural persons tax resident inLuxembourg. - The amount to be refunded resulted from an ex- change of lands between the transparent entity/SCI andtheGrandDuchyofLuxembourg.Thisexchange gave rise to a capital gain on the land given in ex- change. Furthermore, as the land received by the transparententity/SCIhadahighervaluethantheone giveninexchange,acashadjustmentwaspaidbythe transparent entity/SCI fundedby its shareholder cur- rent account. - On 1October 2014, a newentity, the taxpayer in the case at hand (the “ taxpayer ”), was established under theformofanSCS( sociétéencommanditesimple )bytwo shareholders (withone being the SCI). The Loanwas transferred by contribution in kind as part of a busi- ness transfer by the SCI, upon incorporation, to the taxpayer.Shortlyafter,thetaxpayer(initiallyincorpo- rated as an SCS) was transformed into an SA ( société anonyme ).AtthesametimetheSCIwasliquidated.An addendumwas signed so that the Loan could con- tinue to take effect between the Initial Lender and the taxpayer. - InDecember 2014, the remaining shareholder of the taxpayerwasabsorbedbyaLuxembourgentity(cur- rentlytheintegratingentityoftheexistingfiscalunity ofwhich the taxpayer is part). When challenged by the tax office, the taxpayer pro- vided arguments to justify the tax-deductible treat- ment it applied to the interest charge accruing on the Loan.Unconvinced,theLTAultimatelyissuedafinal taxassessmentconfirmingitsinitialpositionon8April 2021 to the integrating parent entity (the “ appellant company ” or the “ integrating entity ”) of the fiscal unity the taxpayerwas part of. On21June2021,theintegratingentityfiledanadmin- istrative claim to the Director of the LTA, unsuccess- fully. As a result, an appeal was lodged with the administrative Tribunal. Judgment of the Tribunal Twomainpointswere consecutivelyanalyzedby the administrative Tribunal: -ThequalificationoftheLoanthatwasgrantedbythe InitialLender,i.e.whetheritshouldberatherregarded as a debt or an equity instrument; and - The tax treatment of the interest expenses deriving fromthis loanat the level of the taxpayer, i.e.whether they shouldbe taxdeductible or not. Characterization of the Loan To address the question of the recharacterization, the Tribunal relied on the parliamentary comments re- lated to article 97 of the Luxembourg income tax law (“ LITL ”).Accordingly,therecouldbeinstanceswhere aloangrantedtoacompanybyitsshareholderscould be assimilated to a hidden capital contribution.Were thattobethecase,theimmediateconsequencewould be that the interests paid on that loan should in prin- ciple not be tax deductible as an ordinary expense of the companywouldbe. Thejudgesobservedhoweverthattheauthorsofsuch parliamentary comments did not establish a clear method or precise rules to determinewhether a loan could constitute a hidden capital contributionwithin the meaning of article 97 LITL, as the text only indi- cates the general context inwhich the recharacteriza- tion of a shareholder loan as hidden capital contributionmay be envisaged, namely: -When thenormal financingmethod, dictatedby se- rious economic or legal considerations, would have been a capital increase; and - When it is evident from the circumstances that the loan structurewas chosen solely for tax reasons. In the case under review, the Tribunal didnot follow thepositionoftheLTA,whichsustainedthattheInitial Lenderhadashareholderrelationshipwitheitherthe taxpayerortheappellantcompany,giventheabsence of elements to evidence their relation, even though it agreed that the Initial Lender was a related party withinthemeaningofarticle56LITL (1) ,notingthatall the entities involved (i.e. the integrating entity/appel- lantcompany,thetaxpayer,theInitialLender)shared the same beneficial owners which were either direct or indirect shareholders in all these companies. In this decision, the judges adhered to a literal inter- pretation of the parliamentary comments which en- visaged the recharacterization only in cases where a loan would have been granted to a company “by its shareholder”.Appreciating that in the case under re- view the Initial Lender was not a shareholder of the taxpayer(albeitaffiliated)northeappellant,thejudges concludedthatahiddencapitalcontributioncould,as a result, not be possible under article 97 LITL. Hence,eventhoughtheTribunalacknowledgedthat, considering all the circumstances surrounding the cases, i.e. a series of operations carried out within a short period of time by related entities sharing the same beneficial owners, the economic reality of the transactionslegitimatelyraisedtheLTA’ssuspicion,it ruled that such concerns did not permit it to exten- sively interpret the rules as established in the parlia- mentary comments in relation to article 97 LITL. It furtherasserteditspositionbyrecallingthatconsistent administrative case law has ruled that for an instru- ment to be recharacterized fromdebt (loan) to equity (hidden capital contribution), it should have been grantedby a shareholder of the borrower. Asaresult,thejudgeconfirmeditsqualificationofthe recharacterizationasadebtinstrument.Onthisbasis, the interest expenses deriving from it should in prin- ciple remain tax deductible in nature unless another legal provisionprovides otherwise. Tax deductibility of the interest expenses Despite this provisional conclusion, it should not be inferred that the tax deductibility of those interest chargesmaynot be deniedonother grounds. In this respect, the Tribunal considered that there wasnoeconomic linkbetween theLoanand the tax- payer as theLoanwas initiallyconcluded by the transparent entity to repay its shareholder current account. As such, the Loan would not have been in- cluded in its net investedassetswithin the meaning of article 19 (1) LITL ac- cording towhich“ Assetswhich by their nature are intended to be used for the business shall form part of the net in- vested assets ” (2) as opposed toprivate assets (article 19 (3) LITL (3) ). To reach sucha conclusion, the Tribunal relied once again on theparliamentary comments. It reaffirmed thepositionof the leg- islator regarding debt payables and receivables which is to classify those items asnet investedassetswhen, tak- ing into account the identity of the borrower and the rationale behind the transaction, they relate to the business activity of the company. The judges rejected the taxpayer’s arguments that sought to demonstrate that the Loan should be con- sidered as having been historically part of the SCI’s net invested assets as follows: - The judges ruled that themere fact that the landob- tainedwith the Loanwas part of the net invested as- sets of the transparent entity is not sufficient for the Loan itself to be considered included in the net in- vested assets aswell. - They also rejected the argument that the Loan fi- nanced the lands exchangedwith theGrand- Duchy of Luxembourg, recalling that the exchange at stake wasfinancedwithotherlandswithahighervalueand cashpayment(i.e.theLoanwasnotdirectlyfinancing the lands received, although such cash payment was made out of the Loan proceeds received). Doing so, theTribunalfavorsanapproachtothequestionofthe financingofassetsfordirecttaxpurposesfocusingon factualelementsandcashflowsasopposedtotheend accounting positions and a more lump sum type of approach. - The judges also rejected the argument according to whichtheinternalfinancing(withtheshareholdersof theSCI,i.e.shareholdercurrentaccount)wasreplaced by an external financing (with the Initial Lender), as theshareholdercurrentaccountshouldnotbeseenas a financing as such. The current account at stakewas linked to thedesire for the SCI’s shareholders tohave accesstothecapitalgainonthelandgiveninexchange that was not effectively distributable due to the ab- sence of liquidity at this time (i.e. an exchange trans- action insteadof a cash transaction). Further to the above, it was concluded that the Loan wastobeconsideredaspartoftheprivateassetsofthe transparent entity. Finally, the Tribunal ruled that the fact that the SCI transferred the Loan as part of a contribution in kind ofitsbusinesstothetaxpayerdoesnotestablishorcre- ate aneconomic linkbetween theLoanand the activ- ity of the taxpayer (i.e. such contribution is not sufficient to establish that the Loan is part of the net invested assets of the taxpayer). For the judge, even though there is no such concept as private assets for capital companies (as opposed to transparententities),operatingexpensestaxtreatment is governed by article 45 LITLwhich essentially pro- vides that only expenses incurred by the company mayinprinciplebeconsideredtaxdeductible.Inother words,thisprovisionallowsthecategorizationasop- erating expense only if: - there is a sufficiently close causal link between the expense and the taxpayer’s income, and if - this link is exclusive enough to rule out that the ex- pensewas actually incurred for thepersonal needs of other persons. In the case at hand, the Tribunal observed that the Loanhadnotbeenconcludedforthepurposeofgen- erating income at the SCI’s level but rather to allow thedistributionofcapitalgainincometoitssharehold- ers. Concluding that such Loan could not be consid- ered as economically linked to the activity of the transparententity(norwiththeactivityofthetaxpayer whenpassedon), theTribunal ultimatelyrejected the deductibility of the interest incurred by the taxpayer in relation to the Loan. Takeaways Thisdecisionisinterestingonseveralgroundsasitad- dresses various recurring tax topics on which some uncertainties remain. Regardingtherecharacterizationofaloanasahidden capital contribution, this decision is not particularly innovative,butitservesasausefulreminder.Inanin- structive manner, the Tribunal reiterates that the choiceforthecharacterizationofatransactionbetween a debt instrument and an equity instrument should bebasedonacombinedanalysisoftheparliamentary commentsrelatedtoarticle97LITLandpastcaselaw. Based on this case law, the reasoning to adopt when assessing a financing operation shouldbe as follows: -As a prerequisite, one should check whether the fi- nancingtransactioniscarriedbetweenpartieshaving a shareholding link with each other – it seems clear fromthisdecision that theTribunal decided to follow a literal interpretation of the parliamentary proceed- ings anddoes not consider the fact that the operation was concludedby two entities belonging to the same group sufficient for equity qualificationpurposes. -Ifthatfirstcircumstanceispresent,oneshouldfollow a case-by-case approach, bearing inmind all the facts and circumstances of the specific case, to assesswhat the normal financing structure resulting from sound economic/legalconsiderationswouldbe.Suchassess- ment should be performed in light of the criteria es- tablished by administrative jurisdiction case law (non-exhaustively listed above). Regarding the non-deductibility of the interest ex- penses, this decision underscores the importance of thetaxpayer’sabilitytodemonstratethattheloanwas undertaken for economic reasons linked to its busi- nessactivity.Therepaymentoffundsmadeavailable tothecompanythroughshareholdercurrentaccounts cannot be equatedwithexternal financing, as the for- malities,particularlythoseconcerningrepayment,dif- fer—regardless of the reasonswhy those fundswere originallyprovided.Thisjudgmentalsoevidencesthe fact that theTribunal favors anapproach to the ques- tion of the financing of assets for direct tax purposes focusing on factual elements and cash flows as op- posed to the end accounting positions and a more lumpsumtypeofapproach.Asthisjudgmentisafirst instance judgment, we should however remain pru- dent at this stagewhendealingwith refinancing. Consideringthecaseisrecentaswesubmitthisarticle, we do not knowwhether the taxpayer will lodge an appealonthisjudgmentinfrontoftheadministrative Court ofAppeal. 1) Article 56 LITL is the legal basis of the arm’s length principle and provides that two enterprises should be considered related partieswhen: - an enterprise participates directly or indirectly in the manage- ment,controlorcapitalofanotherenterprise,or - the same persons participate directly or indirectly in the man- agement,controlorcapitaloftwoenterprises 2)UnofficialEnglishtranslationbytheauthors 3)UnofficialEnglishtranslationbytheauthors:article19(3)LITL: “ Assetsthatcannotbeusedforthebusinessbecauseoftheirpurposemay not formpartofthenet investedassets”. Administrative Tribunal - Judgment on hidden capital contribution requalification and interest expenses deductibility S elon le dernier décompte duministère de la Justice/STATEC, 301 entreprises ont été déclarées en faillite et 51 ont été liquidées aupremier trimestre de 2025. Faillites Le nombre de faillites est resté stable au 1 er trimestre 2025 (301 contre 300 jugements au 1 er trimestre 2024). D’après les premières estimations, les pertes poten- tiellesd’emploissalariésliéesauxfaillitessontenbaisse deplusde27%parrapportaupremiertrimestre2024. C’estauniveaudelaconstruction,secteurleplusim- pacté par les faillites depuis 2023, que la situation se détendnotablement au 1 er trimestre 2025, aussi bien en nombre absolu (avec 50 faillites, soit 15 demoins par rapport au 1 er trimestre 2024), qu’en termes de pertes potentielles d’emplois salariés (-42%). La branche du commerce enregistre 37 faillites au pre- mier trimestre2025, enbaissede21%par rapport au 1 er trimestre 2024, demême que les pertes d’emplois salariés (-17%). Ondénombreégalement38faillitesdanslesecteurde l’Horesca (+31% par rapport au 1 er trimestre 2024), mêmesilespremièresestimationsdepertesdepostes d’emplois salariés sont enbaisse (-53%). Liquidations Les liquidations sont enhaussede 55%au1 er trimes- tre 2025, évolution qui doit être nuancée, car leur nombre s’est situé à un niveau historiquement bas au 1 er trimestre 2024. Environ 45% des sociétés liquidées durant la pé- riode sous revue sont des sociétés holding et fonds de placement. Tous ces thèmes peuvent être consultés dans le Dashboard « Faillites etLiquidations»duSTATEC,publiéle16avril2025.Lesstatistiques sur les faillites se basent sur le relevé des décisions judiciaires, issu du Registre de commerce et datant du 14 avril2025 pour les données les plus récentes. Le nombre de faillites se calcule comme la somme des « ouvertures » ou « réouvertures » déduction faite des faillites rapportées de la procédure judiciaire « jugements et arrêts déclaratifs de faillite ». Ces chiffres sont provisoires. Plusd’infossur :https://lc.cx/2lXNjs Source : STATEC Faillites stables et liquidations en hausse AGEFI Luxembourg 38 Avril 2025 Droit / Emploi