Factual background

In case 48917C,  a Luxembourg limited liability company (LuxCo) had realised losses in the early years of the 2000s before remaining essentially inactive for a few years, having terminated the loss-making business. The shareholder (also a company)  and management of LuxCo remained essentially unchanged. In 2014, LuxCo bought a real estate asset and resold it a few months later with a significant gain. The tax authorities contended that the use of the losses carried forward against profits made with the new  activity after an inactive period would be abusive. Their position was endorsed in lower instance (administrative tribunal judgement dated 30 March 2023 (no 45984).

In case 49336C, in years prior to the tax year pleaded before the court in this case, the taxpayer had already been denied the use of its losses carried forward due to the anti-abuse rule, as ruled in the 2016 case no 35978C. It argued that the abuse finding in that case would only “freeze” the available losses and that these could be used   subsequently when a new activity, similar to the former loss-generating one, had been restarted. The tax authorities asserted that the finding of abuse for prior years meant that the losses were definitively not available anymore.  

New insights brought by these cases

In case 48917C, the court found no abuse mainly because between the parties it was not disputed that there had been no change of shareholder. The court first recalled longstanding case law that under the rules on loss carry-forward there is no requirement for an “economic” identity of the person that incurred the losses and the person who wants to use them; it is enough that it is the same legal person. This does not prevent, however, a challenge under the general anti-abuse rule, most notably on the basis of the so-called Mantelkauf doctrine: the acquisition of a company with loss carry forwards and using that company for a profit making activity if the sole purpose of the acquisition of that company is precisely the use of those loss carry forwards. 

In this case, however, absent a change of shareholder, the freedom to choose the least taxed path allowed LuxCo  to make use of the losses. The court explicitly stated that “a taxpayer who incurred losses in the context of a specific activity must be entitled to terminate that activity and dispose of the assets linked to such activity, and to orientate its business towards another activity which he considers more likely to generate positive income.” Also, the allegation of the tax authorities that the ultimate beneficial owner could have done the transaction without involving the company (and would have been taxed on the gain) did not result in the path chosen being inadequate, namely contrary to the intent of the legislator. Therefore,  the cumulative criteria of abuse of law were not met.

In case 49336C, the court confirmed an earlier finding of abuse of law in a context where a company had terminated its prior activity, changed shareholder and started a new activity with the sole aim of using the losses carried forward against the income generated by the new activity. The court clarified the effect of a finding of abuse: it is definitive. In case of application of the anti-abuse rule, the tax payer is taxed the way it would have been taxed had the adequate, i.e. non-abusive way been chosen. That would have implied there were no losses to be carried forward. Therefore, where the use of losses carried forward is denied under the anti-abuse rule, the losses are not frozen but lost. It is not possible for the taxpayer to make up for the abusive element, e.g., by restarting an activity similar to the loss-making one.

Impact for Luxembourg taxpayers

These two cases provide helpful guidance to assess the likelihood to be entitled to use the losses carried forward in situations where:

  • the taxpayer availing of tax losses considers starting a new (hopefully profitable) activity; or
  • a group considers purchasing a company which also avails of carried forward losses.

Should you have any question, please reach out to the authors of this flash or one of your trusted Loyens & Loeff advisers.