OUR INSIGHTS AT A GLANCE
- On 11 May 2021, the Luxembourg Administrative Tribunal ruled on whether contributions to "account 115" have to be taken into account when computing the acquisition price of a shareholding for the application of the participation exemption regime.
- While the taxpayer and the tax authorities argued on whether account 115 qualified as share capital, the Tribunal judged that these considerations were not relevant in the present case.
- According to the Tribunal, the only relevant question was whether the amounts at stake were paid to effectively acquire the shares.
- In the case at hand, the Tribunal decided that the amounts contributed to account 115 could not be taken into account in order to compute the minimum acquisition price because the taxpayer did not evidence that they were part of the price paid to effectively acquire the shares.
- The impact of this decision should be kept in perspective.
In a recent judgement of 11 May 2021, the Luxembourg Administrative Tribunal (the "Tribunal") ruled on whether contributions to "account 115" (capital contribution without issuance of shares) have to be taken into account when computing the acquisition price of a shareholding for the application of the Luxembourg participation exemption regime. Account 115 is a subcategory of the equity account "share premiums and similar premiums" in the financial statements of Luxembourg companies.
Following a debate between the taxpayer and the tax authorities on whether or not account 115 qualified as share capital and had to be taken into account for the computation of the acquisition price of the shares, in respect of which the benefit of the participation exemption was requested, the Tribunal decided that the contributions to account 115, as performed in the case at hand, could not be taken into account in order to compute the minimum acquisition price of EUR 1.2 million under the Luxembourg participation exemption regime.
While at first glance, the decision seems surprising, the facts were very specific – in particular the account 115 contribution was disconnected from the share acquisition – so the impact of this decision should be kept in perspective.
Facts and position of the parties
On 10 April 2014, a company ("Company A") acquired shares in another company ("Company B") according to a share purchase agreement and simultaneously contributed a certain amount (in cash and in kind) to the account 115 of Company B in accordance with a share premium agreement. On 8 September 2015, Company A acquired additional shares in Company B.
On 16 January 2016, Company B distributed dividends to Company A. Company A considered that the conditions to benefit from the participation exemption were met and therefore requested a refund of the 15% tax withheld by Company B upon the dividend distribution.
The tax authorities, however, denied the reimbursement of the withholding tax, as they considered that the cash contributed according to the share premium agreement did not constitute a portion of the acquisition price of the shareholding and should therefore not be taken into account to determine whether the minimum acquisition price of EUR 1.2 million was reached. Without taking into account the account 115 contribution, the acquisition price was below the 1.2 million threshold so the conditions of the participation regime could not be met.
Position of the tax authorities
According to the tax authorities, from an accounting point of view, reserves, retained earnings and share premiums are not part of the share capital itself. They argue that even if account 115 has been part of the capital contribution account 11 ("Share premiums and similar premiums") since 2009 onwards, which includes the account 111 ("Share premium account"), it cannot be assimilated to a classic share premium. The share premium is indeed the price paid by one or more new shareholders to acquire a right on the previous reserves and which aims to equalise the rights of the old shareholders to those of the new ones, while the contribution to account 115 is often used by companies as an alternative to a classic capital increase. In the case at hand, by making such "informal contributions", the shareholders of Company A made contributions to Company B in which they held a participation, without receiving securities representing the capital or a remuneration in return. They concluded that, as Company A made funds available to Company B for a specific transaction (the capital contribution), this provision of funds could not be considered as a direct participation in the share capital of Company B and thus could not be taken into account for determining the participation exemption thresholds.
Position of the taxpayer
According to the taxpayer (Company A), the tax authorities were wrong not to consider the contribution to account 115 as a direct participation in the share capital. On the contrary, they should have taken this contribution into account to calculate the acquisition price of at least EUR 1.2 million required by article 147 LIR, insofar as the law does not require that this threshold should be reached by contributions to the company's share capital in the strict sense. According to the taxpayer, the effective acquisition price of the participation was therefore the price paid for the shares increased by the account 115 contribution.
As for the condition relating to the acquisition value of the participation, the taxpayer considered that in order to evaluate the acquisition price of a participation, all the contributions made by the shareholder should be taken into account, such as formal contributions, like share capital and share premiums, but also informal capital contributions, i.e., essentially hidden contributions and disguised capital.
In this context, the taxpayer stated that account 115 is included in the standard chart of accounts under class 1 as "capital contributions not remunerated by shares" and that under this same item there are account 111 (share premiums), account 112 (merger premiums), account 113 (contribution premiums) and account 114 (premiums on conversion of bonds into shares), so that the legislator, by adopting this chart of accounts, has, according to the taxpayer, recognised the existence of capital contributions – without the issue of new shares – which are neither share capital nor share premiums but still contributions to the capital/equity.
In the absence of explicit provisions providing the contrary, account 115 should thus also be considered as an element of capital for tax purposes, including in the context of Article 147 LITL, so a contribution to account 115 should also be taken into account when valuing the acquisition price of a participation.
Decision of the Tribunal
According to the Tribunal, there is no doubt that the taxpayer (Company A) holds a direct participation in the share capital of Company B, as Company A acquired shares in Company B in accordance with two share purchase agreements. Neither the tax authorities nor the taxpayers really challenged that point.
However, according to the Tribunal, even admitting that in order to determine the value of a participation it is necessary to refer to formal contributions as well as informal contributions, these considerations were not relevant in the present case insofar as Article 147 of the ITL refers to the sole concept of "acquisition price". In this respect, in the specific case at hand, it does not appear from any element submitted to the Tribunal's assessment that the contribution to account 115 would have served for the acquisition of the shares in Company B. According to the Tribunal, the taxpayer did not evidence that the amount contributed to account 115 was part of the price to be paid to acquire the shares and thus had to be taken into consideration to determine their price at the time of acquisition.
On the contrary, according to the Tribunal, it is clear from the reading of the Share Purchase Agreement that the taxpayer acquired the shares in Company B for a price mentioned in that agreement, payable by 28 April 2014 at the latest and that no additional conditions relating to the acquisition of the shares in question, such as a contribution to account 115, or even relating to the acquisition price, were mentioned in said agreement. As a result, the Tribunal concluded that the acquisition price of the shares could not be higher than the amount indicated in the sale agreement (which was lower than the minimum requirement of EUR 1.2 million).
In addition, it does not appear from the contract entitled "Contribution agreement" of 10 April 2014 that the contribution to the disputed account 115 was a condition related to the acquisition of the shares allowing it to be added to the acquisition price of said shares. On the contrary, the agreement explicitly mentioned, on the one hand, that the account 115 contribution took place purely free of charge by stating, "The Company hereby accepts such Contribution without any obligation to pay a consideration or to issue any shares in its capital in return" and, on the other hand, that Company A was already the holder of the disputed shares of the company at the time of the account 115 contribution by stating that, "The Finance Investors purchased the Shares in the Company from ... S.A. [...] pursuant to a share and purchase agreement dated on or about the date hereof", so as to exclude any link between the acquisition of the shares in Company B through the "Share Purchase Agreement" and the contribution to account 115 of Company B through the "Contribution agreement".
Finally, according to the Tribunal, the only allegation made by the taxpayer, according to which the account 115 contribution took place on the same day and was part of the initial purchase of the shareholdings, is, in the absence of any other explanation or evidence to that effect, and in view of the above considerations, insufficient to consider that the acquisition price of the shares in question would in fact be not only the purchase price indicated in the Share Purchase Agreement, but also the amount contributed to Company B's account 115.
Analysis and implications
Even though the arguments raised by the taxpayer and the tax authorities related mainly to the nature of account 115 and whether or not it is to be considered as share capital, the Tribunal considered that these considerations are not relevant in the present case. As a result, the Tribunal did not address that point.
The Tribunal adopted a very pragmatic and restrictive approach. The condition to benefit from the participation exemption under Luxembourg income tax law under scrutiny is that the acquisition price of the participation reaches a threshold of at least EUR 1.2 million. As a result, according to the Tribunal, the only relevant question was, "Were the amounts at stake paid to effectively acquire the shares?" In other words, would the taxpayer own the shares if the amounts at stake were not paid?
Based on the facts of the case at hand, the Tribunal judged that it does not appear from any element submitted to its assessment that the contribution to account 115 would have served for the acquisition of the shares and the taxpayer did not bring the proof that the amount contributed to account 115 was part of the price to be paid to acquire the shares. As a result, the Tribunal rejected the complaint of the taxpayer, who has lodged an appeal against this decision since then.
As the question was not dealt with, no conclusion can be drawn from the decision of the Tribunal in respect of the equity nature of the account 115 for tax purposes.
Nevertheless, it could be inferred from this decision that if the required proof was brought (i.e., that the contribution was part of the price to be paid to acquire the shares), it would be taken into account to calculate the acquisition price. The Tribunal does not exclude it. The Tribunal only requires a direct causal link between the acquisition of the participation and the allocation to the account 115 and concludes that the link could not be evidenced in the case at hand. For purpose of bringing such proof, the drafting of the legal documentation supporting the acquisition of the shares is key.
Key takeaways to be considered as part of the acquisition price:
|Mentioned in the share purchase agreement as a part of the acquisition price||Not mentioned in the share purchase agreement and paid on the same day as the acquisition of the shares||Not mentioned in the share purchase agreement and paid after the acquisition of the shares|
|Contribution to account 115|
To the extent that the Luxembourg tax law defines the term "acquisition price" as "the total expenditure incurred by the operator in order to bring it to its condition at the time of the valuation", the Tribunal has, in our view, taken a very restrictive approach of the concept of "acquisition price" to the extent that it limited it to the amount formally paid to receive the shares, at the time of and for the acquisition. In reality it is likely that in most cases, such a contribution would only take place as an economic unit with the shareholding and is as a consequence a de facto part of the acquisition cost. The restrictive conclusion of the Tribunal is, in our view, at least debatable. It remains to be seen how the Administrative Court will decide on the appeal that has been lodged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.