Do account 115 contributions form part of the acquisition price? A surprising and unexpected answer by Luxembourg’s Administrative Court

April 13, 2022 | Blog

On 31 March 2022, Luxembourg’s Administrative Court (the Court), the highest court in tax proceedings, ruled its eagerly awaited decision on the above question. Unfortunately, the Court’s ruling did not overturn the lower court’s decision (the Tribunal) of May 2021. In fact, the Court ruled that so-called account 115 contributions, i.e. contributions to the equity of a company without such company issuing additional shares, also referred to as SPERA or capital surplus, cannot be considered to form part of the acquisition price of a participation.

The acquisition price is relevant for exemptions to apply under certain circumstances where a minimum shareholding percentage is not met. The Luxembourg income tax law, stipulates that no withholding tax (WHT) is levied on dividends distributed by a Luxembourg company to a qualifying shareholder if such shareholder has held a participation of at least 10% in the share capital of the distributing company or holds a participation with an acquisition price of at least EUR 1.2M in the distributing company (the Alternative Ownership Test) for an uninterrupted period of time of 12 months. A shareholder may request a refund of the WHT levied if these conditions are met retrospectively. Also, for purposes of the Luxembourg participation exemption, under which income and gains derived by a Luxembourg corporate shareholder from a qualifying participation are tax-exempt, the acquisition price is relevant as alternative conditions, i.e. a participation of at least 10% is required or the participation in the subsidiary has an acquisition price of at least EUR 1.2M for dividends and liquidation proceeds / EUR 6M for gains held for an uninterrupted 12-month holding period.

While the case only deals with the application of the WHT exemption, the Court does state that the conditions of the participation exemption should be interpreted in a similar manner.

The facts of the case can be summarized as follows: A Luxembourg limited liability company or SARL (the Shareholder) acquired shares issued by a Luxembourg public limited company or SA (the Subsidiary). The Shareholder acquired less than 10% of the shares of the Subsidiary, but made contributions to the account 115 of the Subsidiary resulting in a total amount paid by the Shareholder in respect of the shares of the Subsidiary in excess of EUR 1.2M. Sometime later, the Subsidiary distributed a dividend to the Shareholder and withheld 15% WHT. The Shareholder applied for a refund of the WHT with the Luxembourg tax authorities, which was denied.

The Luxembourg tax authorities considered that the contribution to the account 115 of the Subsidiary constitutes an informal contribution without compensation for the Shareholder and should be considered an advance of funds which does not trigger a participation. The Luxembourg tax authorities consequently considered that the Shareholder did not meet the Alternative Ownership Test for the WHT exemption to apply and refused the refund.

The Court confirmed that the account 115 contributions cannot be taken into account to meet the Alternative Ownership Test and, similar to the Tribunal, denied the WHT refund. The Court argued that the concept of “participation in the share capital” applicable for the WHT exemption refers to the holding of shares or units in the share capital of the distributing company within the meaning of the law of 10 August 1915 on commercial companies, since only the holding of such securities generates a direct legal relationship with the subsidiary, conferring the status of shareholder/member. The Court further considers that the “acquisition price” referred to in the tax valuation principles excludes with respect to a participation any expenses which do not increase the number of securities or the nominal value of the securities or expenses which constitute a direct accessory to such an increase. The Court stated that in the case at hand the account 115 was not directly attributable to the relevant shareholder and did not entitle the relevant shareholder to any direct counterpart.

As noted, the decision of the Court was unexpected. It was generally expected that the Tribunal decision would be overturned. What the Court states is that contributions of equity to a company in which shares are owned will not be taken into account as acquisition price for the investment in that company. In cases where contributions to the account 115 have been made where the 10% threshold is not met, it would be good to review options.

Sign up for our newsletters