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Luxembourg: Appeals Court Overturns Fiscal Integration Ruling
06 February 2009
The Luxembourg administrative appeals court has issued a decision in which it overturned a judgment of the administrative tribunal, finding that six Luxembourg sister companies all fully held (or nearly fully held) by a Belgian parent company were not eligible for the fiscal integration regime.
The Luxembourg administrative appeals court issued a decision on fiscal integration (no. 21,979C) in which it overturned a judgment of the Administrative Tribunal (first instance court in administrative and direct tax matters) (nos. 19,717 and 20,624, Aug. 23, 2006).
The case, which addresses tax treaty law as well as EU law, involves six Luxembourg sister companies all fully held (or nearly fully held) by a Belgian parent company. One of the Luxembourg companies realized a substantial loss (impairment of a participation) in 2004, while the other companies were highly profitable. To offset the positive and negative results of these various subsidiaries against each other, the Luxembourg companies applied for fiscal integration treatment; that is, for the joint taxation of the group companies involving compensation of positive and negative results.
Under Luxembourg tax law, group treatment is allowed if the parent company is a Luxembourg company or a permanent establishment of a limited liability company of a company based in another EU member state. Further, the parent must hold at least 95 percent of the shares of the fiscally integrated subsidiaries from the beginning to the end of the financial year. The fiscal integration regime is granted on application for a period of at least five years.
The condition that the parent company needs to be a Luxembourg company (or a permanent establishment of a foreign company) was not fulfilled in the case at hand. Accordingly, the office of assessment refused the application for fiscal integration, which requested permission to grant the Luxembourg subsidiaries fiscal integration regime treatment by allowing them to offset their results (horizontal compensation), neglecting the results of the foreign parent (no vertical compensation). The other treaty country, in this case Belgium, had the right to tax the parent company's income. The claimants maintained that the refusal to grant fiscal integration violated the nondiscrimination article of the Belgium-Luxembourg tax treaty - specifically article 24, paragraph 6, which prohibits different treatment of an enterpris of one state simply because its share capital is held by a company of the other state. The only reason why fiscal integration for the Luxembourg subsidiaries was refused was that the parent was not a Luxembourg - but a Belgian - company.
The first instance court agreed with the claimants' reasoning and in its August 23, 2006, judgment (no 20.624) accepted fiscal integration of the six Luxembourg subsidiary companies. The government appealed this judgment before the appeals court, which rather surprisingly overturned the judgment and refused to allow the fiscal (horizontal) integration.
The appeals court, in its April 19 decision (no. 21,979C), held that there was no discrimination against foreign parent companies, as Luxembourg tax laws did not provide for an only horizontal integration regime. The refusal of horizontal compensation between Luxembourg companies held by a foreign parent thus was not a problem because horizontal compensation was not allowed between Luxembourg companies either.
It is difficult to follow this reasoning. Although fiscal horizontal (only) integration is never provided by Luxembourg law, the system of article 164bis provides for "total" fiscal integration, that is both vertical (compensation between parent and subsidiaries) and horizontal. It remains true that if the parent had been a Luxembourg company, then fiscal horizontal integration would have been granted in addition to vertical integration. The appeals court heard that in purely domestic situations a parent company frequently does have a zero tax liability: If it is a pure holding company, the dividends are tax exempt and in the absence of substantial costs (financing costs) the parent's tax liability is zero or negligible. In essence the only consequence of the fiscal integration regime regards horizontal compensation. Vertical integration is not a possibility for a Belgian parent, so the taxpayer did not even request such treatment. However, horizontal integration is not excluded, and it was nevertheless refused because of the mere fact that the parent is a foreign company.
The appeals court appeared to dismiss the EC law aspects of the case; it was specifically invited to ask the European Court of Justice to take up the question but refused to do so. The appeals court stated that the assumption that loss compensation between resident companies would be possible is erroneous. That refusal to refer the case to the ECJ appears to be a clear breach of EC law, insofar as the last instance national court (which is the case here) has to refer the case to the ECJ if an interpretation of EC law is involved. The instant case clearly meets that criterion. Most tax scholars would agree that the EC law aspects of this case are pretty obvious and that the appeals court should have referred the question to the ECJ.
Jean-Pierre Winandy, assistant professor, Université du Luxembourg is a partner at Loyens Loeff, Luxembourg.
