The Luxembourg tax consolidation regime found to be contrary to EU law
In a decision dated 14 May 2020, case C-749/18, B e. a. v Administration des contributions directes, (hereinafter, B and others), the Court of Justice of the European Union (hereinafter, CJEU) ruled in a case relating to the Luxembourg tax consolidation regime.
The Luxembourgish tax consolidation regime and the question of compatibility with EU-law
Some important facts relating to the Luxembourg tax consolidation regime are first discussed prior to addressing the CJEU ruling in B and others.
The tax consolidation regime, enshrined in article 164bis of the Luxembourg income tax law, can be described as “a special taxation regime of the consolidated profits of a group of companies” for the purpose of achieving neutrality. It allows a group of companies to opt, under certain conditions, for the common taxation of the companies of a group, or of certain companies of the group only, through the aggregation or compensation of their tax profits during the taxable years the regime is applicable .
The application of the tax consolidation regime requires the companies to follow a certain set of mandatory steps. First, the companies opting for the consolidation must report individually their own accounting and tax profits. Second, these companies must remove from their accounting results any double deductions or double taxations that might arise from the operations between companies of the group. Finally, all the aggregated results must be consolidated at the level of the integrating company, which involves offsetting the positive and negative results of the companies concerned to reach the consolidated taxable income for tax purposes of the integrating company.
This regime, as applicable at the time of the CJEU decision, only recognized a vertical compensation of profits between the different companies of a group. As such, access to the regime was strictly linked to the participation and inclusion of the parent company and allowed for consolidation within the perimeter of a single tax jurisdiction only. This regime did not however permit a horizontal tax consolidation of the subsidiaries alone excluding, thus, from the tax consolidation the parent company – despite the latter holding a 95% participation in these subsidiaries.
The compatibility of this tax regime with the freedom of establishment as guaranteed under EU law was previously raised before the Luxembourg administrative courts to the extent that said regime only allowed for vertical integration. However, a decision from the Cour administrative dated 19 April 2007 ruled the regime to be in conformity with EU law.
The B e. a. case
The compatibility of the Luxembourg tax consolidation regime with EU law was raised again before the administrative courts as of 2017 in the B and others case. In the latter, involving taxable years 2013 and 2014, a group of companies filed a request to extend their existing vertical consolidation to other subsidiaries of the same foreign parent company to achieve, in reality, a horizontal integration of various national subsidiaries and sub-subsidiaries.
To achieve such a result, B and others relied upon the 2014 SCA Group Holding e.a. decision of the CJEU invoking that such a horizontal consolidation is in conformity with EU law. The Luxembourg tax authorities disagreed with that view and ascertained instead that only vertical consolidation between companies of a group were to be viewed as in line with Luxembourg tax law and more particularly with article 164bis of the Luxembourg income tax law.
The Tribunal administratif, which is the first instance tribunal in the judicial review of tax disputes in Luxembourg, agreed with B and others’ position. Indeed, the tribunal stated that the Luxembourg tax regime was contrary to EU law as it only allowed for vertical consolidation. Despite this apparent success, B and others could not however benefit from a horizontal consolidation for the 2013 taxable year on procedural grounds as it was found that the company did not file a request for such a consolidation with the Luxembourg tax authorities. Indeed, it should be noted that under article 164bis of the Luxembourg income tax law, any consolidation request is subject to a joint written request from all the companies candidate to the consolidation. This joint request must be submitted to the Luxembourg tax authorities before the end of the first year for which the companies are opting for consolidation.
Following the appeal introduced by B and others and the cross-appeal filed by the State, the Cour administrative recalled its 2007 decision in which it stated that article 164bis of the Luxembourg income tax law, as applicable until 2014, did not directly discriminate against non-resident parent companies. In the view of the Cour, article 164bis of the Luxembourg income tax law, equally precluded horizontal tax consolidation of subsidiaries of both a non-resident parent company and a resident parent company, so that, from this point of view, there was no inequality of treatment between companies whose capital was held in whole or in part by parent companies resident in the Union compared with companies whose capital was held in whole or in part by companies resident in Luxembourg.
However, in its analysis, the Cour administrative also took into account the CJEU’s decision of June 2014 in SCA Group Holding e.a.. On the basis of the latter, the Cour administrative acknowledged that the comparability analysis performed by the CJEU did not strictly lie on the comparison of parallel situations encompassing both the exclusion of a horizontal consolidation of subsidiaries involving a resident parent company, on the one hand, and a non-resident parent company, on the other hand. Instead, the Cour relied on the fact that the CJEU admits as a comparability criterion the question whether a non-resident parent company, which has exercised its freedom of establishment in a concerned Member State, through the setting up of various subsidiaries – without however the establishment of its own permanent establishment there – may still access the tax consolidation regime through the resident subsidiaries it has setup in that Member State, or whether such access is refused by the domestic law of the Member State concerned.
Considering that it was uncertain how to interpret this situation in light of EU law, the Cour administrative decided to stay proceeding in a decision dated 29 Novembre 2018 and to refer various questions on the compatibility of the Luxembourg regime with EU law to the CJEU for interpretation.
In its response to the first question, the CJEU confirmed, without much surprise, its prior analysis from the SCA Group Holding e.a. case and held that articles 49 and 54 of the TFEU were precluding Luxembourg legislation from excluding a horizontal tax integration between resident subsidiaries of a non-resident parent company.
In its second question, the Cour administrative enquired about the specific tax consequences resulting from the change in the circle of integrated companies from a vertical integration to a horizontal integration. The CJEU reviewed Luxembourg legislation prior to 2015 and the new legislation adopted in that same year to find out that the integration from vertical to horizontal unjustly required the dissolution of the former integration structure. It viewed this situation as discriminating cross-border situations compared to purely national integrations and found it to be contrary to EU law.
The CJEU ruled thus that articles 49 and 54 TFEU opposed Luxembourg legislation as it had the effect of compelling a parent company having its registered office in another Member State to dissolve a vertical tax consolidation existing between one of its subsidiaries and a number of its resident sub-subsidiaries in order to allow that subsidiary to form a horizontal tax consolidation with other resident subsidiaries of the said parent company. The CJEU noted that this dissolution was triggered despite the resident integrating subsidiary remaining the same. Finally, the CJEU observed that one of the consequences of the dissolution of the vertical tax consolidation before the end of the minimum duration of the existence of the consolidation, as provided by national legislation, required the individual tax adjustments of the companies concerned.
Following the CJEU ruling, the Luxembourg legislature amended article 164bis of the Luxembourg income tax law within the 2021 budget law admitting, for the future, the possibility to move from a vertical integration to a horizontal one without having to face a dissolution of the initial integration.
In its third and final question, the Cour administrative questioned whether Luxembourg legislation, which provides for a specific deadline for filing a request for admission to the tax consolidation system, was in conformity with EU law. Indeed, under Luxembourg law, consolidation requests must be submitted to the Luxembourg tax authorities before the end of the tax year for which the consolidation regime is requested.
The CJEU recalled that, as general rule, the existence of reasonable deadlines for lodging a claim is compatible with EU law to the extent that such time limits are not such as to render practically impossible or difficult the exercise of rights conferred by Union law.
Regarding the 2013 taxable year, B and others argued that it should benefit from the horizontal integration despite not having filed a consolidation regime request as prescribed by Luxembourg law for that specific year as it argued that the Luxembourg tax authorities would have rejected, in any case, its horizontal integration claim based on their understanding of the law at that time.
The CJEU rejected that view. It ruled that the mere fact that the Luxembourg authorities might have rejected the companies’ claim did not amount, according to the CJEU case-law, to an objective impossibility to lodge such a claim or to a situation under which such an action would cause excessive difficulties on the part of the company or to a situation that could not be reasonably expected from B and others.
Final decision of the Cour administrative
In a decision dated 15 October 2020, the Cour administrative issued its final ruling in B and others.
In its decision, the Cour found that article 164bis of the Luxembourg income tax law was incompatible with EU law with respect to the horizontal integration aspects that were confirmed by the CJEU. Before the Cour, the Luxembourgish state did not formulate any objections following the ruling of the CJEU relying, instead, on the principle of primacy of EU law.
In its ruling, the Cour administrative recalled that the national judge must ensure the application of EU law provisions and their effectiveness by leaving, if deemed necessary, through its own initiative, any provision from its national legal system that is contrary to EU law. On this basis, the Cour disregarded the unlawful condition contained by article 164bis of the Luxembourg income tax law according to which, only a parent company holding directly or indirectly interests in Luxembourg subsidiaries, that were to be included in the integration, should be resident in Luxembourg or have an establishment there and be constituted as an integrating parent company at the head of the tax integrated group. This condition was thus ignored by the Cour for the 2013 and 2014 taxable years at stake.
Secondly, the Cour rejected an interpretation of article 164bis of the Luxembourg income tax law, which had the effect of establishing a strict separation between vertical and horizontal tax consolidation regimes and the obligation, as a result, to end any pre-existing vertical integration prior to establishing a horizontal tax consolidation group. On this particular point, the Cour ruled in favour of B and others for the 2014 tax year.
For 2013, despite the CJEU ruling on the validity of the deadline imposing the filing of an integration request before the first year for which the tax consolidation is requested, B and others tried to challenge this limitation invoking the principle of legal certainty, the principle protecting legitimate expectations as well as the constitutional principle of the Rule of law. The Cour rejected these arguments and ruled in favour of the tax administration whose decision consisted, for 2013, in denying B and others’ access to a horizontal tax consolidation in the absence of a timely application.
Conclusion | This case has the advantage of clarifying the obligations of Member States in the design of tax policies, which permit tax integration mechanisms. As this case has shown, Members States are required to ensure that access to the regime is subject to similar conditions for resident parent companies and non-resident parent companies admitting, thus, vertical and horizontal integrated structures on the same basis to the extent that a non-resident parent company cannot assume the role of an integrating company.
As such, even if a State only admits, in principle, vertical integrations, it must also permit the possibility of a horizontal integration of subsidiaries at least in favour of non-resident parent companies so that they can also access the tax consolidation regime.
This case has also the merit of having put to rest doctrinal debates in Luxembourg regarding the conformity of Article 164bis of the Luxembourg income tax law with the freedom of establishment. It must be noted that the Luxembourgish legislator had previously modified the integration regime through the adoption of a law dated 18 December 2015 in order to render it in line with the 2014 CJEU ruling in SCA Group Holding e.a.. However, the recent decision of the CJEU in B and others forced the Luxembourg state to modify its legislation once again since the strict separation between horizontal and vertical integrations was found to be contrary to EU law.
It is therefore to be hoped that the amended regime resulting from the 2021 budget law will resist further reviews of conformity with Union law.