On March 31, 2022, the Luxembourg Administrative Court of Appeal ruled that, in order to determine the minimum acquisition value of a participation for the purposes of the Luxembourg parent-subsidiary exemption, the contributions to a “115 account” should not be taken into consideration.
Contributions to a 115 Account — Definition
As a reminder, an account 115 contribution is a capital contribution without issuance of shares. This type of contribution is included in the Luxembourg Standard Chart of Account (LSCA) group 111 equity accounts called “share premium and similar premiums”. It is a specific account classification which involves a contribution of value in the special equity reserve account of the company. It has been developed by Luxembourg practitioners to ease equity contributions in an intra-group context mainly. The benefit of these equity contributions is that it can be made without the cost and formalities associated with notarial deeds.
Background of the Case
In 2014, a Luxembourg resident company (the “LuxCo” or “Parent company”) acquired shareholding in another Luxembourg resident company (the “Subsidiary”). The Parent Company contributed an amount to the account 115 of the Subsidiary. The total investment in the Subsidiary, including the account 115 contribution, reached at least €1.2 million.
The Subsidiary then distributed a dividend to the Parent Company and a 15% withholding tax was levied at the level of the Subsidiary since the 12-month holding condition was not yet fulfilled. The Parent Company then claimed a refund of the withholding tax once the holding period was met considering that all the conditions required to benefit from the dividend withholding tax exemption from the parent-subsidiary directive were also met.
In this respect, it is recalled that the minimum shareholding that qualifies for the dividend withholding tax exemption under the Luxembourg parent-subsidiary regime is either (1) a 10% participation or (2) an acquisition price of at least €1.2 million.
Here the Parent Company only held a shareholding of 4,5% in the Subsidiary but claimed that its shareholding in the Subsidiary had been acquired for more than €1.2 million. The Parent Company took into account the amount contributed in account 115 to reach this acquisition price criteria.
The Luxembourg tax authorities did not follow this reasoning stating that the account 115 contribution cannot be assimilated to an equity participation and denied the refund request. They did not consider the accounting classification and stated that the account 115 contribution is an informal contribution that does not involve an issuance of shares and does not serve the same purpose as a share premium for which shareholders acquire a right on existing reserves and balance the rights of new and current shareholders. Consequently, the Parent cannot benefit from the exemption from dividend withholding tax since the minimum holding threshold is not reached nor the minimum acquisition price.
On 11 May 2021, the case went before the Luxembourg Administrative Tribunal which confirmed the Luxembourg tax authorities position. On 31 March 2022, the Luxembourg Administrative Court upheld the decision.
The Court stated that only the shares materialize the legal relationship between the Parent and the Subsidiary and the acquisition cost of an asset corresponds to all expenses supported by the purchaser to acquire it. Consequently, there is no sufficient link between the share capital and the account 115 and contributions to the account 115 cannot increase the acquisition cost of the participation since it does not provide new shares to the shareholder and does not increase the existing shares value. The account 115 contribution had to be excluded from the acquisition price of the shares under those circumstances.
As a consequence of this restrictive decision of justice, every time an account 115 contribution is made, it should be closely monitored to make sure the parent company holds at least 10% of the share capital of its subsidiary or that the minimum acquisition cost met through instruments should be sufficiently linked to the share capital of such subsidiary.