1. Introduction - Elvinger, Hoss & Prussen

LUXEMBOURGA third limitation exists if the sold exempted participation resulted from thereinvestment of the proceeds of a sale of a non-exempted participation whichbenefited from a deferral of tax on capital gains (see section 2.3.3 below). In thiscase the capital gains realised at the time of the first sale (and which were notsubject to tax at the time) will not benefit from the participation exemption; however,it may again be deferred under the conditions set out in article 54 LIR.A final exception exists where the substantial participation sold had beenacquired in exchange for a non-qualifying participation, inter alia as a result ofa merger or a demerger resulting in an exchange of shares or in a share-forshareexchange where the seller received the shares now being disposed of.However, this exception is only applicable in the first five years after the initialexchange.2.2.2. Tax deferralIf the conditions for the substantial participation exemption are not fulfilled, anycapital gains realised on the sale of shares will be included in the taxable profit ofthe seller unless the conditions for deferral provided for by article 54 LIR are fulfilled(see under section 2.3.3).2.2.3. Non-residentsSubject to treaty provisions, capital gains on the sale of shares in Luxembourgcompanies by non-residents (where the shares are not connected to a LuxembourgPE of the non-resident) can be subject to Luxembourg tax in the followingcircumstances. Non-residents will not be subject to Luxembourg tax on capitalgains realised on the sale of shares in a Luxembourg company unless the non-residentshareholder has held a substantial participation within the meaning of article100 LIR (essentially 10 per cent of the share capital) and the sale occurswithin six months of the acquisition of the shares. Furthermore, certain non-residentswho were formerly Luxembourg residents and who held a substantial participationas defined in article 100 LIR will also be subject to tax on capital gainseven if the sale occurs more than six months after the acquisition.2.3. Sale of business assetsAs indicated above, capital gains on the sale of assets by a company are subjectto corporation tax at the full rate of 30.38 per cent. The form of the consideration(cash or in kind) is irrelevant. There are neither particular abatements, nor areduced rate available on the sale of certain assets, depending for example on theobservation of a particular holding period. There is, however, an exception to thisgeneral taxation for capital gains on substantial shareholdings, benefiting fromthe substantial participation exemption (see section 2.2 above).Assets are also deemed disposed of at the time of the liquidation of the Luxembourgcompany, at the time of the conversion of a corporation into a tax-transparentpartnership or at the time when the owner transfers its tax residenceabroad or transfers an asset to a foreign PE. The reference value for the calculationof the capital gains at the time of liquidation is given by the estimated trans-442