1. Introduction - Elvinger, Hoss & Prussen

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LUXEMBOURGassets and liabilities to two or more new or existing companies and where shareholdersexchange their shares in the demerged company for shares in the beneficiarycompanies, and spin-offs and split-offs, i.e. transactions where a companytransfers, without being dissolved, part of its assets to a new or existing companyand its shareholders receive shares in the beneficiary company while remainingshareholders of the demerged company, or where the shareholders receive sharesin the beneficiary company in exchange for their shares in the demerged company.From a company law perspective, currently only a true division is possiblefor sociétés anonymes but a Bill of law is currently pending to provide for thepossibility of spin-offs and split-offs (Bill of law no. 4992).In relation to demergers, the law adds a condition for tax neutrality which doesnot apply to mergers. Article 170(3)2 LIR states that the assets transferred to thetransferees, as well as assets retained by the demerged company, have to includeat least an autonomous part of business. An autonomous part of business in thiscontext basically means a business which may operate on its own, independentlyfrom the rest of the undertaking. In the presence of a true division, where thedemerged public limited company disappears as a consequence of the transaction,this condition should a priori always be met, as a public limited companyby virtue of article 14 LIR always carries on a commercial business, which isdeemed transferred in its entirety in the context of the demerger.Four particular cases need nevertheless to be more carefully considered. Thefirst case concerns a holding company which only holds participations or alternativelya company which both operates a business and holds participations andwhere one or more participations are transferred to one of the new companiesresulting from the division without other business assets. The participation ina subsidiary should in our opinion be recognised as an autonomous part of abusiness, in particular if the demerged company was a holding company or ifthe participation represents a separate business of the demerged company. Thetax administration in charge of capital duty has in the past taken the oppositeposition.The second case exists where the assets contributed to one of the new companiesconsist solely of real estate property, in particular where the operating businessis contributed to the other new company. It has been admitted in the past bythe tax administration that in certain circumstances real estate may constitute anautonomous business.A more problematic case exists where only cash is contributed to one of thenew companies, as it is very likely that cash cannot on its own constitute anautonomous business except in case of the transfer of a deposit-taking business.A final particular case arises where solely a trading portfolio of securities issplit off. In circumstances where the recipient company is or becomes authorisedas a professional of the financial sector dealing in securities for its own account,it will have received these initial assets as a business and such a portfolio of securitiesshould be considered as an autonomous part of the business.2.3.7. Transfer pricing rulesIn the case of the sale of a business asset to a non-resident related party, the Luxembourgtax administration may reassess the transfer value of these assets if a446
transfer value below market results in a shift of taxable profits to the benefit of anon-resident taxpayer, which is linked, directly or indirectly, to the transferor.This is, however, only an application of common transfer pricing rules.If transfer prices are exclusively motivated by a particular relationship a Luxembourgundertaking has with a non-resident taxpayer, and are not based onsound business reasons, the Luxembourg tax administration may reassess theundertaking’s taxable profit (articles 56 and 164 LIR). A shift of profits outsideLuxembourg between related parties, for instance through excessive indebtedness,implying (excessive) deductible expenses, may therefore be challenged onthe grounds of common transfer pricing rules (see section 2.7 below).According to article 164 LIR, a hidden profit distribution arises where a director indirect shareholder receives moneys or other advantages from a companywhich he would not have received in the absence of this capacity. No tax deductionis available at the company level for these expenses. These moneys oradvantages are further treated as a dividend and thus are subject to dividend withholdingtax.There is no specific controlled foreign company legislation in the Luxembourgtax code.2.4. The buyer of sharesThe buyer will need to record the participation acquired in its balance sheet at theacquisition price plus eventually costs connected to the acquisition. If the participationis considered as a fixed financial asset it cannot be amortised. If a nontemporarydepreciation in value occurs, the assets may be written down and thiswrite-down reduces taxable income accordingly. However, where the reasons todepreciate have ceased to exist, the valuation must be rectified up to the acquisitionprice which will in turn increase taxable income.The assets of the company acquired cannot be revalued as a result of theacquisition of its shares.2.5. The buyer of business assetsHOSS, SCHAFFNERThe buyer will record the assets acquired for their true acquisition value, exceptif an adjustment is made by application of transfer pricing rules. The assetsacquired may be depreciated by application of the straight line or the decliningbalance amortisation method, depending on the nature of the relevant assets.If a tax-neutral transfer has been made under Luxembourg rules or those ofanother EU jurisdiction in accordance with the Merger Directive, the issue iswhether the transferee has to take over the transfer values on which the transferorhas relied in its tax return. In order for the transfer to remain tax neutral, the lawrequires in the context of a Luxembourg transfer that the transferee uses the samevalues as the transferor. Thus, if the transferor realises a totally or partially taxneutraltransfer of assets, the transferee may not benefit from a step-up or onlyfrom a partial corresponding step-up in basis for these assets. This mechanism isintended to avoid all, or, as the case may be, part of the capital gains commerciallyrealised at the time of the transfer not being subject to any taxation on afuture disposal.447
Page 1 and 2: LuxembourgLuxemburgLuxemburgoBranch
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1. Introduction - Elvinger, Hoss & Prussen

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