The Administrative Court clarifies conditions and valuation aspects under Article 22bis

On 21 November 2024, the Administrative Court released a case law clarifying important aspects concerning the conditions for applying Article 22bis of the Luxembourg income tax law (“ITL”) permitting inter alia, tax-neutral contributions of shares at book value. The case law also discusses the assessment of the estimated realisation value (“valeur estimée de réalisation”) from the perspectives of both the contributor and the beneficiary when the conditions for a contribution at book value are not met.

Here is what you need to know: 

• The case law emerges from the liquidation of an SA (“Company B”) and concerns the determination of the taxable income for the appellants, which are the shareholders of Company B. This income is determined as the difference between (i) the liquidation surplus and (ii) the acquisition cost of the shares in Company B. The appellants argued that the acquisition cost retained by the Luxembourg tax authorities (“LTA”) for the shares in Company B was incorrect. 
• At the time of the liquidation, the appellants held 100% of Company B’s shares, which they had received through a donation. The acquisition cost for an important participation acquired gratuitously should match the cost of the last onerous acquisition, which is the amount the donor paid when Company B was incorporated. In this case, the donor had originally established Company B with a cash contribution and an in-kind contribution consisting of shares in an SA (“Company C”). The valuation of the in-kind contribution by the donor was subject to debate, particularly around whether the contribution was made as a tax neutral share-for-share exchange.
• In principle, a contribution of shares is considered as a share-for-share exchange, i.e., a disposal of certain shares, followed by an acquisition of other shares. Whilst in principle disposals take place at fair market value (allowing latent gains to be realised) Article 22bis ITL, however, provides an exception that permits a share-for-share exchange to occur at book value if certain conditions are met (not all reviewed in the present case). 
• In particular, one of the conditions of Article 22bis ITL is that the acquiring company should either obtain the majority of the voting rights in the acquired company or increase the majority it already possesses through the exchange of shares. The Court, aligning with the Tribunal's position and the taxpayer's arguments, interpreted these requirements in accordance with Directive 2005/19/EC, which requires the acquisition of at least a simple majority of voting rights in Company C. Opposing the government’s view which suggested that control over Company C was held indirectly by the taxpayer’s family, the Court emphasized that the condition should be assessed solely at the level of the acquiring company (Company B), excluding any consideration of indirect control at the level of the shareholder or above. Since Company B acquired only 33% of the voting rights in Company C, this condition was not met. It is to be noted that the Court did not analyse any other arguments, particularly those raised regarding the conditions related to the shareholder’s status. According to the taxpayer, because the donor was resident in Switzerland at the time of the contribution, Article 22bis ITL would not apply. This would be due to the tax treaty entered into between Switzerland and Luxembourg allocating the taxing rights over the gains realised on the shares to Switzerland. Conversely, the government's position is that Article 22bis ITL does not establish any conditions related to the shareholder’s status, and that imposing such conditions would go beyond the text of the law. Having said this, the Court overall agreed with the taxpayer's position, confirming that one of the conditions for applying Article 22bis ITL was not fulfilled, such that that latent capital gains were realised at the donor's level upon the contribution, and that the contribution of Company C’s shares into Company B's capital was effectively made at the estimated realisation value. 
• To document the estimated realisation value of the contribution, which partly determines the acquisition cost of the shares in Company B at the time of the liquidation, the taxpayer referred to a 2019 valuation report (no report having been dressed at the time of the contribution in 2016). The taxpayer further argued that the estimated realisation value used for assessing the capital gain realised at the donor’s level at the time of the contribution may deviate from the estimated realisation value retained by the beneficiary (Company B).  The Court dismissed the post-contribution report, prepared shortly before the liquidation, and affirmed that the estimated realisation value retained by the beneficiary (Company B) at the time of the contribution generally binds the contributor (the donor), unless a valid discrepancy can be justified. The Court also confirmed that this estimated realisation value, in turn, partly establishes the acquisition cost in Company B, which is relevant to determine the taxable income upon liquidation.