LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
Vertical tax consolidation is available where a fully taxable Luxembourg resident company, or the Lux - embourg permanent establishment of a foreign com - pany subject to a tax comparable to Luxembourg CIT, directly or indirectly holds at least 95% of the share capital of one or more fully taxable Luxembourg resident companies, or of a Luxembourg permanent establishment of a foreign entity subject to a compara - ble tax. Both the integrating parent and the integrated subsidiaries must have the same financial year end. Horizontal tax consolidation applies where sev - eral subsidiaries are held, directly or indirectly, at a minimum of 95% by the same non‑integrated parent entity. The integrating and integrated entities may be fully taxable Luxembourg companies or Luxembourg permanent establishments of foreign companies subject to a tax comparable to Luxembourg CIT. The non‑integrated parent may be: • a fully taxable Luxembourg company; • a Luxembourg permanent establishment of a for - eign company; • a foreign company resident in a European Eco - nomic Area (EEA) member state and subject to a comparable tax; or • a permanent establishment located in an EEA member state of such a foreign company. Even though the parent is not part of the consolida - tion, the 95% shareholding requirement must still be met. All integrating and integrated entities must share the same financial year end. Where the 95% shareholding is held indirectly, all intermediary companies must themselves be corpo - rate entities fully subject to a tax comparable to Lux - embourg CIT. Tax consolidation takes effect only upon written request to the Luxembourg tax authorities and applies retrospectively from the start of the fiscal year in which the request is filed. Once elected, the regime must be maintained for at least five tax years. 2.7 Capital Gains Capital gains are subject to CIT and MBT. However, Luxembourg offers rollover relief for certain qualify -
ing exchange operations, including transformations involving a change of legal form. Share‑for‑share exchanges – whether implemented through asset contributions or mergers – may be carried out on a tax‑neutral basis provided that the new shares received are treated as replacing the former shares and that the ultimate taxation of the exchanged assets remains secured. Rollover relief is available on capital gains realised by a resident transferor company whose assets and liabilities are transferred to another resident compa - ny, or to a company resident in the EU or the EEA, as a result of a merger or division. The relief applies when the transfer occurs in exchange for shares in the transferee company or through the cancellation of a participating interest held by the transferee in the transferor. A balancing cash adjustment may be paid, provided it does not exceed 10% of the nominal value of the shares issued. In addition, the transaction must preserve Luxembourg’s right to tax the unrealised gains existing at the time of the transfer. This gener - ally requires a transfer at book value and, if the trans - feree is not Luxembourg‑resident, that the transferred assets remain attributable to a Luxembourg perma - nent establishment. This latter condition applies only in so far as the capital gain would otherwise have been taxable in Luxembourg. Capital gains realised by a Luxembourg company or permanent establishment on the disposal of shares in a subsidiary are exempt from tax where, at the time the gain arises, the seller has held – or commits to hold for at least 12 uninterrupted months – a direct and continuous participation of at least 10% in the subsidiary or shares with an acquisition cost of at least EUR6 million. The subsidiary must either be an EU undertaking covered by the Parent–Subsidiary Direc - tive, a fully taxable Luxembourg capital company, or a non‑resident company subject to a tax comparable to Luxembourg CIT. In practice, the Luxembourg tax authorities generally require that the foreign company be subject to a minimum tax rate of 8% on a basis comparable to Luxembourg’s. Under the recapture rule, the exemption does not extend to the amount of related expenses previously deducted for tax purposes. Capital gains remain taxa -
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