Administrative Tribunal’s decision on denial of availability of tax losses carried forward

Background and summary

LuxCo in question was denied the use of carried forward tax losses based on the abuse of law provision, contained in paragraph 6 of the Steueranpassungsgesetz (“StAnpG”).

This provision, as applied by the Tribunal in the case at hand, requires the below four conditions to be cumulatively met:

• use of private law forms and institutions;
• reduction of the tax burden;
• use of an inappropriate path;
• no non-tax reasons justifying the use of the chosen path.[1]

The Tribunal considered that the individual shareholder who ultimately owns and controls LuxCo derived a tax benefit from carrying out the real estate transactions through LuxCo. Namely, LuxCo had sufficient tax losses to offset the capital gains, whereas the same speculative gain would have been taxable had it been realised by the shareholder.

In the Decision at hand, the Tribunal also considered the excessive payments from LuxCo to a UK resident company as hidden dividend distributions, however, this conclusion will not be further analyzed.

The following aspects of the Decision will be addressed:

1. Facts of the case
2. Arguments and the Decision of the Tribunal
3. Our observations

[1] The abuse of law provision was amended as from 1 January 2019, with the implementation of the Anti-Tax Avoidance Directive.

Facts of the case

LuxCo was incorporated on 14 January 2000 in the legal form of a public limited liability company. It performed holding activities until 2009, followed by a period of being dormant between 2009 and 2013.  

On 12 May 2014, LuxCo acquired real estate and sold it shortly thereafter, on 31 October 2014. Upon the sale, taxable capital gain was offset by the tax losses carried forward from the period in which LuxCo was performing holding activities.

Since the incorporation of LuxCo until 2013, its tax return indicated as the purpose of the company "acquisition of participations".  Following the real estate purchase and sale transactions, LuxCo made a change of activities both in its tax return and in its annual accounts for the year 2014, substituting the holding activities by real estate management.

Luxembourg tax authority (“LTA”) denied the use of the tax losses to LuxCo on the basis of it being a dormant company from 2009 to 2013 and the change in its activities following the real estate transaction. LuxCo filed an appeal with the Tribunal.

Arguments and the Decision of the Tribunal

While the Tribunal acknowledges the right to carry forward losses is not subject to the existence of a corporate identity based on economic criteria, such as the pursuit of the same economic activity, it considers that the legal and tax personality of a company cannot be used for the sole purpose of circumventing the personal nature of the right to carry forward losses.

Analysis of the application of the abuse of law provision

Use of private law forms and institutions

In its analysis of the application of the abuse of law provision, the Tribunal firstly refers to the condition of use of private law forms and institutions. In this regard, it notes that the purchase and sale of the real estate by the LuxCo meet the condition.

Reduction of the tax burden

The reduction of the tax burden is fulfilled in view of the Tribunal and consists in a tax saving arising from the use of the tax losses carried forward.

Use of an inappropriate path

As regards the use of an inappropriate path, the Tribunal notes the inconsistency of LuxCo’s corporate object before and after the real estate transactions. By looking at its activities, it considers that LuxCo was incorporated to perform holding activities, rather than invest into real estate.

Even if it could be assumed that LuxCo was incorporated in order to carry out real estate activities, the Tribunal stresses out that the purchase/sale transaction in question was the only intervention of LuxCo in the real estate sector. Since its incorporation, LuxCo has never positioned as an economic actor in the eyes of the general public, nor has made any material investments (such as commercial premises accessible to the public, a website, a marketing campaign, etc.).

Moreover, the Tribunal notes that LuxCo was a dormant entity between 2009 and 2013.

The Tribunal further refers to case law confirming that the application of the abuse of law provision requires an analysis of all the operations carried out, as well as the individuals or legal entities involved, regardless of the question of which person is at the origin of the abuse of law.

In this context, it considers that there is sufficient evidence to conclude that the legal and fiscal personality of LuxCo was used solely to benefit from the tax losses carried forward and reduce the tax which should have been due on the real estate operation at hand. Furthermore, it is not disputed that LuxCo is ultimately owned and controlled by the person who derives, in the view of the Tribunal, the tax advantage

Non-tax reasons justifying the use of the chosen path

LuxCo argued the alleged will of its shareholders to limit “significant risks with regard to the work to be carried out and the uncertainty over possibilities of finding a buyer at the desired price” by “reactivating” a dormant company in order to carry out the disputed operations through it.

However, the Tribunal considered that these reasons are not sufficient to overturn the finding of the LTA that the disputed operations constitute an abuse of law and that they are not motivated by considerations other than tax.

Our observations

The analysed Decision denied the use of carried forward tax losses to a Luxembourg company based on the abuse of law provision. Even if this provision may apply when taxpayers take advantage of tax law, its application should not be excessive.

Application of the abuse of law provision, as in the present Decision, may lead to legal uncertainty with regards to the availability of tax losses for companies which changed their business activities, are carrying out activities not provided for in the bylaws, and have been dormant over a period of time. An appeal against the Decision was filed with the Luxembourg Administrative Court (n° 45917C).

Should you have any questions with regards to the Decision, do not hesitate to reach out to the Tax team at Grant Thornton Luxembourg.