CLASSIFICATION SHEET This document relates to the following request: 8 March 2010 References: MF1/JNLE/NECE/S34910006M-AOMO Sella Bank Luxembourg S.A. 1999 2215 227 I. K_!y to_pics: Tax losses 2. Name of the advisor : PwC 4. Name of the project: N/ A S. Amount intended to be invested: NIA 6. Date of receipt: ENTREE - 8 MARS 2010
ADDITIONAL WORKSHEET This document refers to the following company: 8 March 2010 References: MFI/JNLE/NECE/S349 I 0006M-AOMO Sella Bank Luxembourg S.A. 1999 2215 227 _J 2008 --- I. Tax returns drafted by : Dcloitte up to] 008 ~ 2. Last tax return filed : 3. Request to postpone the filing of the tax return j until : 4. Last assessed year : I 2004.. 5. Tax advances: CIT MBT NWT 6. Estimated profit : _j 9,575 7. Tax carried forward losses (31.12.2008),I 38,351,929
Chart of the current structure of the client: NIA J Summary of the current tax position: Cf. Advance Tax confirmation dated 19 October 2009 (Ref: RMS/MFI/ AELD/NECE/S34909001 M-JNLE)
For the attention of Mr Marius Kohl Administration des Contributions Directes Bureau d'imposition Societes VI 18, rue du Fort Wedell L-2982 Luxembourg PriccwaterhouscCoopcrs Societc a rcsponsabilitc limilcc Reviscur d'entrepriscs 400, route d'esch B.P. 1443 L-1014 Lm.:ernbourg Telephone t 352 494848-1 Facsimile +352 494848-2900 www.pwc.com/lu info@lu.p\\c.com 8 March 2010 References: MFl/JNLE/NECE/S34910006M-AOMO BUREAU D'f MPOSITION SOC. 6 ENTREE - 8 MARS 2010 Sella Bank Luxembourg S.A. 1999 2215 227 Tax losses Dear Mr Kohl, In our capacity of tax consultant of the above-mentioned client, please find below the tax treatment applicable to the transactions foreseen/implemented by our client. This letter aims at confirming the conclusions reached during our today meeting and will serve as a basis for the preparation of the tax returns of the Luxembourg companies involved. A. Background I. We refer to our meetings held on 12 June 2009 and 21 September 2009 and to the Advance Tax Confirmation ("ATC") that was submitted to you for signature on 19 October 2009 (reference: RMS/MFl/AELD/NECE/S34909001 M-JNLE). 2. According to the A TC, it has been confirmed that the New Bank resulting from the partial demerger of Sella Bank (Luxembourg) S.A. ("The Bank") is entitled to carry forward all the tax losses incurred by the Bank. B. Applicable tax regime 3. The Tribunal AdministratiC in its decision regarding the entitlement to carry forward tax losses by a taxpayer dated 6 July 2009, adopted a legal approach for the application of the provision of Article 114 of the Luxembourg Income Tax Law. This judgment was confirmed by the Court of appeal in its decision dated 4 February 2010. R.C.S Luxembourg ll 65 477 TV/\ LU17564447
4. Accordingly, the legal approach should be followed. The economic approach should only be taken into account in case of abuse of law. 5. Our analysis is not in breach of the position taken by the Court of appeal in its recent judgment as such position would only recognize the foll legal effects of a partial demerger. The tax losses will then be apportioned up to the level of activity transferred to New Bank. As, in the case at hand the whole banking activity will be exercised by New Bank, the full tax losses will be carried forward by New Bank only. 6. Therefore, the analysis and conclusion reached in the A TC will not be jeopardized by the decision of the Luxembourg Court. We remain at your disposal should you need any further information and would like to thank you for the attention that you will give to our letter. Yours sincerely, (, L~ L Murielle Filipucci Partner Alberto Morpurgo Senior Manager Appendices: Appendix l: Appendix 2: Advance Tax Agreement dated 19 October 2009 Decision of the Court of Appeal dated 4 February 20 I 0 T/i/s wr agrcemc111 is based on Ilic facts as presented to Pricewaterho11seCoopPr.1 Si1rl as at the dale the advice was given. 711e agreement is dependent on specific facts and circ11111stanccs and may not be appropria1e to any party 01her than 1/ie one for which ii ll'as prepared. This lax agrecmenl 11 as prepared wuh only the inlerests of Sella Bank Luxembourg S.A.. 1n 111111d, and was 1101 planned or carried 0111 111 conte111platw11 of any use by a11y other party. Pricewa1erho11seCoopcrs Silrl, ifs parlners, employees and or agenls. neither Oll'e 11or accept a11y d111y of care or any respo11sib1hty to tmy other party. whether 111 co111ract or i11 tori (me/ruling 11 11hou1 l111nta11011. 11eghge11ce or breach of swtutory duty) howe1-er arising. and shal/ 11ot be liable 111 respect of Oii}' loss. damage or expense of whalewr nature wluch 1s caused to any 01her /Xlrl)'. (2)
C LASSIFICAT IO N SHEET This document relates to the following request: 19 01.:tober 2009 Refon:nccs: RMS/MFl/AELD/NECE/S34909001 M-JNLE BUREAU O'IMPOSITION SOC 6 ENTREE Sella Bank Luxembourg S.A - 1999 2215 227 1. Key topks: I a:1. lo~:--~ s Z. Nt1nw of tht advisor : Pw(' 3. Corpornte group ~ nan~c. or fu nd sponsor: ~dla.t. Na nil' of the projt'cl: Ni.'\ S. Amounl int<'ndcd lo be invcsll'd: N/A 6. Datt of rect.'ipl:
For the attention of Mr Marius Kohl /\dmimstrntion des Contributions Dirn<.:tcs I3urcau d'imposition Sucictes VI 18. rue du Fort Wedell L-2982 Luxembourg Prict'" :ll~rhou~t-c oopcn Socit;li\; r<'s1>011~11bili1i limilt;r l~hi~t ur d't 111rc 1.11 hl'b Wll, l\iui <l'r,..,h Ill' l.f B I IO I-I I u~, mboufll I d.:phon.: 35:! 19 1X4X I Facs11111l1: ~ 352 1'1411-l~ -2'1(!11 ww".pwc C llt lu iul(>fcdu pwl:.l:l lll I 9 October 2009 References: RMS/MFl/t\ELD/NEC'E/S3490900 I M-JNLE Sella Bank Luxembourg S.A - 1999 2215 227 Partial dcmcrgcr D<.:ar Mr Kohl. In our capacity of tax consultant of the above-mentioned client, pica e find below the wx treatment applicable to the transm:tions foreseen by our client. This kttcr aims at confirming the conclusions reached during our meeting dated 12 J unc 2009 and 21 Scptl!mber 2009 und will serve as a basis for the preparation of the tax rctums or the Luxembourg companies involved. A. Facts.\.1 Description of the Bank I. Ban<.:a Sella S.p./\. (now called Sella llolding Banca S.p./\.) was set up in l 886 as a limited pannership by members of the wealthy Sella family in the province of Bi1.:lla in the north-western Italian region or Piedmont. The bank originally operated under the nmnc or Banca Gaudenzio Sdla&C'o., and became a joint-stock company in 194<). 2. During the 1990s, the bank started expanding internationally by acqumng u minority partic..:ipation in Compagnic Financicrc Martin-Maurel S.A ( 1993) and opening a brarn.:h in Luxembourg in 1995 (Banca Sella S.pA. no more listed on the CSSF website). 3. Sella Bank Luxembourg S./\ ("the Bank") is a Luxembourg joint-stock company incorpornt<.:d on 8 April 1999 under thc name 113L Investment Bank Luxembourg S.t\. It is held at ~3.66% by Sella l lolding Banc..:a S.p.A. and at 76.34~'0 by Sdla llulding 1:\. V, u Dutch company.
4. The Bank offer:- private and wrroratc bankmg services to privulc and institutional clients and ranked Rih for its activities, according to the hanking list cstahlished hy the Luxembourg Wort in 2009. 5. For its private clients, the Bank provides custodial services. financial management advice and a discretionary management service. 6. For its institutional clients. the Bank offer the creation or Luxembourg or offshore investment vehicles. domictlintion. administrative management and accountmg. associated bank deposit services and numerous specialized services such as the issuunce or bonds, stock exchange flotution and the creation of bank assurance products. 7. Due to the cu1tenl market situation as well as the past history of the Bank 1, it appeared to the management that a new impetus is needed in order to further develop the bank activities in Luxembourg. ln this respect, it 1,.vas decided to restructure the Bank to face this new cha I lcnge. A.2 Description of the restructuring ~ - The rcstructuration will consist in a partial dcmcrgcr of the B.111k pursuant lo Article 288 of the Law of I 0 August 1915 on commercial companies, as amended by the I.aw of I 0 June 2009. 9. The foreseen partial demcrger consists in the reduction of the share capital of the Bank up to the contribution of the assets to the New Bank and the subsequent cancellation of these shares. The New Bank will issue shares up to the contrihution and in favor of the shareholders of the divided Bank. I 0.!he partial demergcr will be realized trough: (i} (ii) The incorporation of' a New Bank whose purpose is to carry out the whole private and corporate banking activity by the transfer of the coitespon<ling assets and liabilities. The major part of the Bank employees will be transferred to the New Bank which will rent new offices: The current Bank will be converted into a professional of the financial sector ("Old Company") whose purpose is to manage the litigation assets and liabilities. The Old Company will keep the material and human resources needed to carry out its activities. 11. The creditors of the Old Company \vould be protected by a legal commitment from shareholders to intervene in case the resources of the Old Company would not allow it to fullill its rcsponsihi lities. (2)
12. The allocation of the assets and liabiliti<.:s will be finally determined in the Dcmcrgcr project in accordance with the above guiddines. The steps of the partial demergcr wi II all take place hy the end of 2009 in order for New Hank to start its activities on I January 20 I 0. B. Tax treatment B. I Tax residence 13. 13ascd on article 159 of the Luxembourg lnt;omc Tax Law ("LITL"). a company is tn.:atcd us a tax resident in Luxembourg provided that either its registered office or its ct::ntrat administration is located in Luxembourg. Under douhk tax treaties signed with Luxembourg, the tic-bnmker rule is the place of cffecti\ e management. 14. In this respect, Board meetings and Shareholders mectings of Ncw Bank and Old Company will be physically held in Luxembourg. The accounting will he done and the ri.!cords arc kept in Luxembourg. Furthermore, regular meetings will take place:.: in Luxembourg through which all the important and slrutcgic decisions will physically bc taken in Luxembourg. 15. As a result, New Bank and Old Company arc effectively managed from Luxembourg and qualify as Luxembourg tax resident companies. Should the need arist.:, a tax residence certilicate could be obtained. 8.2 The partial dcmcrger 8. 2. 1 Tax neutrality of the partial de merger 16. The partial clcmcrger will he realized under the tux ncutrulity as long as the following conditions. mentioned in Artidc 170(3) of the Luxembourg Income Tax Law (''L!TL"), arc met: (i) (ii) (iii) (1v) The companies toking part in the partial ctcmergcr arc Luxembourg fully taxable resident joint-stock companies; The contribution will only be remunerated by shan.:s representing the share cupital or New Bank (a maximum cash outlet of I O~o of the nominal or par value may however be accepted) to the shareholders of the divided company, i.e. the Bunk. Therefore, the shares of the 13unk will he cancelled up to the contribution to the New Bank; The distribution of shares of N<.:w Bank will he apportioned uccording to the previous holding percentage i11 the Bank; The contribution will be realized at book value in order for the unrealized capital gain linked to the activity contributed to remain subject to taxation in Luxembourg later on; (3)
(v) The assets transrcrred will represent a business or a part or a business (branch of activity) and the Bank, after division in Old Company, \vill keep at least one branch of activity. 17. In the case at hand, the demcrgcr wi ll have the effect to transfer an autonomous pati of business to New Bank (i.e. the full banking business). At the same time, the divided company, i.e. Old Company, wi ll keep a branch of activity through the asset management activity it will carry out. for this purpose, Old Company will also keep the liabilities attached to the assets managed as well as needed staff and materials to reach its business purposes. B.2.2 Tax neutrality at the level of the shareholde1 s 18. The shareholders will exchange their shares in the divided Bank for shares in the New Bank. Given the comments from the Chamber of Commerce and the State Council regarding the Drall Bill 11 5829 (5829/1 and 5829/6), the provisions of art. 22bis (2) 3 LITL should normally apply also to a partial dcmergcr as this transaction should be tax neutral (sec in this respect the comments from the Chamber of Commerce and the State Council regarding the Draft Bill 11 5829). 19. /\.s a result, none of the shareholders of the Bank will be taxable on any porential gain that may arise from the partial dcmcrger. ln this respect. the holding period on the shares in New Bank v..'ill be computed as from the acquisition date of the shares previously held in the Bank (article 22bis (4) LITL) in order to benefit from the withholding tax exemption under article 14 7 LlTL. B.3 C arry forward of the tax losses of the Bank B.3.1 Article 114 LITL 20., Article 114 LITL- provides that a taxpayer can deduct as special expenses under article I 09 (I) 4 LITL, tax losses incuttcd in the past in its business undertaking without any time limit provided that the following conditions arc met: (i) (ii) (iii) These tax losses could not have been used/deducted previow;ly to off."et other income or any debt waiver as foreseen by article 52 LITL ("gain d 'assainisscmcnt "); The accounting of the taxpayer is in line with general accepted accounting principles; Only the business undertaking who suffered the lax loss can carry it forward. 21. In case of business restructuring, the key criterion is the one of identity or taxpayer according to the tax legislation. Indeed, as long as the taxpayer incurring the losses and the one using them arc the same entity, the carry forward of tux losses will not be denied. I!owever, there is a discussion on whether the economic or legal analysis should be adopted in order to determine if tbc identity condition is met. To h1. r.:;id w11h lh.: Circul:u ixllrr I IR n" 11411 da1~d 15 'h:pll'lnhc1 200.1 (4)
19. According to a recent case Jaw (against which an appeal was introduced by the Luxembourg Tax Authorities) 3, it was held that as the provision::; or ai1icle l 14 LITL are clear, there should be no room for intcrpn.:tation. Therefore, given that the article of law refers to legal concepts, they should be intcrpretc.:d based on their meaning in the wmmercial law and not based on an economic approach. 20. Based on the traditional interpretation of article I 14 LITL, the argument would be that the business undertaking who suffered the tax losses is the Bunk and not the >Jew Bank resulting from the partial demcrgcr. Therefore, only the Old Company would be entitled to carry forward the tax losses as its legal personality docs not '"change" further to the dcmergcr. However, this reading is nol satisfying even based on a legal approach. Further details on the conditions to carry forward tax losses as well as on the approach to be taken could be found in Appendix 2. B.3.2 Appfic(lfio11 oftlze legal approach in case of a partial demerger 21. Should the condition of identity be only considered in the light of the commercial Jaw. the l'ull legal consequences of the partial dcmcrgcr must be taken imo account. In this respc<.:t, a partial dcmerger entails a universal trans for of assets and liabilities to u new entity, i.e. New Bank, according to article 288 of the law dated August I 0. J 915. paragraph I. as amended by article 28 of the law dated J unc I 0, 2009: H /,a scission par co11stitwio11 de no11velles socil;th es1 / 'op<irario11 par laquel!e 1111c socit;te (...) trans/he. sans dissol111io11, (l une 011 pl11sie11rs soci(>1c\ 110111'l'lle111<!11t constitwil's, 1mc partie vu/ 'ensemble de son µatrimoi11e. ac1iveme11! el passi\'( ment, 111oye111u111t /'attrib111io11 cl ses associes d 'actions ou de parts des.rncii:t(;.,. bc!11e/iciaires et. frem11clleme11t, d '1111e soulte en especes 11c depassanr pas 10''1, de la rnlcur nominale des actio11s 011 paris a1trib11ees 011, cl d~fhut de \l(/feur no111i11ale, de leur pwr compwhle». 22. As a result, New Bank as well as Old Company arc deemed to be part of' the divided t.:l)mpany. the Bank. but cannot be considered alone as the sole heir of the di\ 1dcd company. rhi::; still holds true even if Old Company continues the legal person of the Bank as the legal titles and obligations o!' the Bank un: mostly transferred to New Bank in the ease at hand (inc.:luding lh!.! start). Morco\er, another clue of the continuity of the Bank by New Bank lays in the foct lhat part or the shan: capital of' the Bank will be cam:ellccl and allrn.:atcd to the New Bank further to the partial dcmergcr. 23. Therefore. transferring the tax losses only to Old Company would not he in line \\'Ith the legal consequences of the demcrgcr a::;. (.!\\ Bank inherits from part or the es\lltc ol'the divided t:ompany, i.e. the Bank. A trnnsrcr of tax losses apportioned to the acti\'ity transf'erred to New Bunk would then be more in line \\1th the legal 11nplicat1ons and, 111 addition, would follow the rationale behind article 11-t (1) 3 LIT!.. Indeed. in case of a lransfor of a business by succession. the tax law provides that the bcnclit.:iary can d<.:duct the tax losses incurred by the transferor provided he was collet.:th dy taxed with him at the time the tax losses wcrc 1ncurred' 1. l'nbu11.1l 1\J11111:hlr.111r. 1> Jul) Wtl'I. 11 ~11JX:? In ~J\I,' nl l"o \II lllurl' h nclicr.tnl.,., la~ Ii.,;~,.., ;rn.: 1r.m~fc11. J pm nlla lhcu nvhts.1cn1nhng lu lhc CirculJI l c'lll'i n" 114 'I 1fatc'tl I~ Scptcmh, r.'00 1 (5)
24. Even 1 f this exception was initially foreseen only for mdividuals, the application to partial demergcr of companies would entitle New Bank to carry forward part or all the tax losses of the Bank as it cany out the same activity and was pre\ iously taxed together ~1th the divided company. B.3.3 Method to apportion tlie tax losses 25. 26..,~ w I. l\s there is no guidance regarding the apportionment of tax losses in case of pa1iial demergcr, reference could be made to the tax legislation in force in neighbor countries (The Netherlands, Germany, France and Belgium r<:ir instance). Jn s<.:vcral or them, the transfer of tax losses in case of a partial dcmcrger is authorized provided that they arc apportioned and provided that certain economic requirements arc met. For further details, plca<;e refer to Appendix 3. In the case at hand. the tax losses lo be carry forward by Old Company or Ne\\ Hank \s,. ill be apportioned based on the activity transfctted. Given that the banking busmcss, which was the core activity of the Bank is only transfcned to cw Bank, only this company will be entitled to carry forward the whole amount of tax losses incurred hy the Bank (1.e. EUR :rn 351 929 of tax losses as at 31.12.2008 and an1 additional tax losses to be incurred until the partial division is realized). In case the identity criterion should also be consider<.:cl 111 the light 0f an economic analysis (depending on the outcome of the appeal introduced against the judgment dated 6 July 2009), the tax losses should also have to he allocated to the Ne\ 1.: Bank us il continues the economic entity or th<.: Bank (same shareholders. same activity). R.3.4 The 11011 application nf anti-abuse provisions 28. None or the anti-abuse provisions will apply to the dcmerger given the underlying sound economic reasons for such rcstructu1ing. For additional details on the non application of anti-abuse provisions, please re for to Appendix 4. (6)
We remain at your disposal should you need any further information and would like to thank you for the at1cntion that you will give to our request. \ Yours s111tcrd y, r ~/\~-~ - --r- Partncr Murielle filipucci Partner., Appendices Appendix I : Appendix ~ : Appendix 3: Appendix.+: Sd la Bank (Luxembourg) S.A. Conditions to carry forward tux losses in Luxcmhourg Overview of the becoming of tax losses in case of dcmcrgers m our neighbor countries Non application of anti-abuse provisions J1n\ /cl\ ag1,, mo:t j\ b~ah/ Vfl Im. Jue/\ ti.> pn. ff. ll(l'l' lo /i111 c.twlllt rhrn,;, ( (,U/Jt'rt s,;,.,,n '11 :hr dt1/1' tlh._,,,.h' 11 -~H j!l\'t'll 111' ~'l:' c1.:111t 111., ti, I nc/, 111 '".\Jlt:L!I:< /ti<. I.\ au.1 c;rcum.hunce~ u11d mut not b, c:p/wo/jl"wltt /fl any /KU 11 11tl1C'r 1l1tu1 tlw '''ff,,,,- ' '1wJ1 /,' \\ "'-" 11r.par<1/ /1.1.1 1,11.1gr""'""' t1l/l /ll<'j111rcd \\ilh 1111/\ 1/w 1/lln'l'\/; u/ Sella /11111A / 111<111/>11111-g S.:I in 111i11d. t1111/ 11'111t111I11/111111, d '" n1rncd 0111jl/,1mte11111l11/lfl11 u/ <llly "'' lw 1111y olirfr pauy l'rtn 11 11 1 rh<-11s1 ( '0011 rs S1/rl. 11> partm 1,,, l'lll/''"l <'1'.r <111.l nr ux1 1111. "' 11hc1,,...,. uor,,. <' "!'' 11111 duty u/, an,,,. 11111 n s1~m.1"1/ti/111 1u 1my u1/11 r p 11rt1 nlwthn 111 L'CJl//r,1t t "r 111 11 1 I 11111!11di11.~ 1111/:11111 l1m1tu1w11. t11 gt1gn11,.,,. /Ir,"' h!) 1:111111 >1'1' cf1111 I lru11, 1, r 11n.w1,i: 1111d 1/r11// 1ro1 I>< /w/>lc- m f<'l/11'< I,,(ti/II l11<r d.1111t1,i(<' ''' 1/><'1111 11/ 11 /1111,,,., 1(<1/111"(' \\"/J(("/J /~ 1ill.\C c/ (II 111111)//rl'I' /~11"/,1' (7)
Appendix 1 Sella Bank (Luxembourg) S.A. Sella Bank Luxembourg is held by Sella Holding BY and by Sella I folding Banca S.p.A. It exercises the banking activity, including the private banking, corporate banking and Salles des Marches activities. 2 The well-known events of the last management (2001-2003) have undermined the credibility and the reputation of SBL on the market. Such a negative trend \.vas due to the necessity to fucc the provisions required by the litigations, arisen and only pa11ially dclined. and to the leaving or clients linked lo the worscnmg of the hank's rcputati on. 3 The research of a new impetus for the hank occurs in the most appropriate moment as the possibility to have an efficient and "safo" banking ~tructure becomes the condition sine qua non to be attractive towards the clients interested to the services rendered by a I.uxembourg bank. 4 The profit an<l loss account for the years 2003-2008 shows a continuity of losses, nlong with a contraction of' the assets. In this respect, it is sufficient to recall such loss, taking into account that for year 2008 the negative result worse due to the write-down of the credit towards Lehman Brothers International (Europe) Ltd, currently in administration. and by the implementation or redundancy plan which involved the payment of money as incentive to the exit. 2003 (1.849.742) 2004 (J.615J48) 2005 (5.923.796) 2006 (3.963.345) 2007 ( l. l 39.690) 2008 (4.212.170) (8)
Appendix 2 Conditions to carry forward tax losses in Luxembourg A Legal requirements Article 114 LJTL 5 provides that a taxpayer can deduct as special expenses under anidc I 09 (l) 4 l.itl, tax losses incurred in the past in its business undertaking without any time limit provided that the following conditions arc met: (i) (ii) tiii) These tax losses could not have been used/deducted previously to offset other income or any debt waiver as foreseen hy aniclc 52 LITL ('ga111 d 'assai11isseme11t "); The accounting of the taxpayer is in line with general at:<.:<.:pled accounting principles; Only the business undertaking who suffered the tax loss can <.:arr) it forward. 2 This aniclc should be read taking into account the historical and econonm; background. B l listorical background 3 Before World War II ("WW II"), Luxembourg tax legislation denied the carry forward of tax losses in all cascs 6. During WW II. the German tax legislation was applied to Luxembourg according to > ordinances 7. The application of this Gcm1an direct tax legislation in Lux<.:mbourg was validated ultcr WW II by the Grnnd-ducal dc1.;rec dulcd 26 Odobcr 194-t. Based on this legislation, thi.! carry forward of tux losses was U\'ailablc under <.:i.!rtain conditions~. 5 Bill 11vs71 was ujoptcd by the law of 1967 which cnch.:tcd the current article 114 l.itl (fonncrly a1ticle 127). The cmtcnl article was not signi ticantly modi lied (except in 1990 to withdraw uny time limit to the carry forward of tux losses) since its enm:tment more than 40 years ago. 6 To u <.:e1iain extent, the current wording or artick 114 l.itl is no longer appropriate given th<: evolution of the economic market since 1967. 0 To b.: rcjj \I ath 1lw Cucul.1r l-<11l'r I IR n'l 14 I Jull'tl IS S -plcrnbcr '.!00-i l'arhamc111:11y d1>11j111c11111' 571, ~0111mc111:iril'' 011 J1t1ck 127 of1hc Brll. p.346 and 'l'i Ordonr rnc, d11i- J 30 Scp11:111bc 1 I 'l IO ( V13ll. 1940. p.17), Ordo1111a11cl' dutc'ci 25 Novc111h, r 1940 ( VBll I 9 IO. p 14 7), 01dn1111,uw, d<hcj31 lkccrnhl'r l 1 1.\\l(Vl31l. l9 10,p476) P.irhaml'lllOI) J111.umc111 n 'i71. curnmcntanc:. on urtick 1:?7 oftlw llrll. p 346 anj ~c-i (9)
7 For instance. the condition of identity between the business undettaking who suffered the tax loss and the one who can can-y forward it was ah initio provided with only commercial activities directly excrci/,cd hy individuals in mind and not specifically for corporations 9. Moreover, the concept of pru1ial division was only introduced in the Luxembourg legislation on June 10, 2009 10. 8 Given this background. the requirement of identity of the individual is justified as taxes arc personal. Indeed. it should not be accepted that an individual can deduct a tax loss effectively suffered by another individual. Nevertheless. the tax legislation provides for an exception in case of a transfer of the business by succession where the beneficiary can dedud the tax losses incurred by the trans fcror provided he was rollcctively taxed with him at the time the tax losses were incu1tcd 1. This is a case of an authorized transfer as there arc different legal persons but there 1s only one taxpayer. 9 Article I 14 LJTL is applicable to corporations according to article 162 UTL and to the Grand-ducal Decree dated 3 Dcccinbcr 1969. The identity criterion hcing also applicable to corporations, the right to can-y forward tax losses should normally be denied only when there is a new legal cntity 1 ~. Doctrine confirms that tax losses arc maintained as long as the legal personality is not changed (sec the specific application of this principle in case of conversion as a specific provision of the law leads to the entitlement lo carry forward tax losses in this case) 1 '. According lo traditional doct1inc therefore, in case of a division where the divided company disappears. the tax losses should normally be lost 14 I 0 In this respect, it appears that article 114 LITL was enacted for individuals and not for corporations. The condition of identity required by aitidc 114 LIT!, is therefore not adapted to corporate reorganizations and was enacted before mergers and divisions verc introduced following EU company directives and before EU directive 90/434/EEC providing for tax neutrality in case of mergers and dcmcrgcrs. C Economic background 11 The economic analysis is generally applied in order to levy the appropriate taxes when the legal form of the transaction docs not correspond to the underlying real economic situation 15. " /\ S1t~1.:l1c11. l'n. u~ d..i;. dmi.l!i~ illa~.[m1 rcrns..;. ~004. p..\60. parap.raph 560. 1';111iamcn1ary d11<..11mc111s n' 57 1. commcnl~ on a111clc l 21. p 346 nn<l,.,l'q. ' \rt1dc 2XX ni" the l:iw dated I 0 /\up.u~i 1915. l'amgr.iph I. a" amcmkd hy a11iclc ~g (lf lhc law d111.xl I 0.hnw 20<N ii 111 case o! 1wn or 111on: hcnclic1:11 i ~.1aA lm.~c's arc 1m11.\l"crrcd pm rata 1he11 ngh1' nccnr<lin!! lo lhc Circula1 Lc11c1n'114 I <lalc'(l 15 Sep I e111ocr 2004. I ' 11 Eh111ger. Rcck111gcr. rnpponcur:- mniommx. IFAC 1998, p.c.~0 : "/,fi 1rwuflir111at1111is de /)( r.101111,., mmr1/<.< tcllu </LU /1., 14 l"hlll1rc>llt'll/j de f()i 11/r SO< ih11i1 e a f '/11/rrir11r di.'s.~odf-tl>.f df' t11pita/.!("/.f,1 /fjll.i CIC I/Ill II 0 1~/{ccll /1/ J'a.t I'll dmil cfrj.mt"ihl;f fa pc r.1 1111111 111m 11l1. l'llli/1: 1111"id1q1w 11111 fo111i1111e dr 1 il'n s<>u.1 la m1'mt fnrmr, n "uffcur111 pm la ru1.i.iil>ili111f di' 1'Cf)()lf d1 prrt1.< 11 Elv111gl"1 R,'Ckingcr. 111J11Xlll"ur~ mllmnaux, IFA( 199~, p.627. I~! nr 111~1.Jlll:C. *6 of 1h, Adapw1iu11 L;iw fstcu cr~1npa~~lljl!!s!,!.csct.:r) 1cgunhng abu~~ o\" luw Fo1 1\trthcr 1ktails plcam' 1l'fc1 h 1\ St«1d1cn. Mill1ucl <led.mi! n.~l.11, Drrl!J..fig;ilL~.w;nli. r. I. Sainl l'aul. :!006. p. 68.. 1 and ~c-q ( 10)
11 The economic method derives from the German "Wirtsch<{(fliche Be1raclit1111gsweise" pr1nciple and is often applied by the Luxembourg courts. For mstunce, the Luxembourg Supreme Court has ad of tcd the economic approach to 1:malysc th1,; tax consequences of a legal ugrecmcnl 1 (Conseil d'elut 13 juillct 1955 n.5473 Parsic.:r. XVI page 352). As a result, in case of any discrepancy between the economic and legal position, the economic approach should prevail. This economi<.: approach 17 is notably applied regarding the ownership (legal \'S. cconomic) 1 x and also regarding the tax treatment or lease agrecmcnts 19. 13 Even if the application of the economical analysis is discus-;cd regarding the tax losscs 20 this approach is still interesting to analyze the consequences of the tax rules in case of business restructuring. Based on the current practice. it seems that onl y a kind or legal approach is adopted 21. 14 The cmt) forward of tax losses cunnot he considered as a fa\orablc tux m~asurc but as an essential tax provision to avoid any increase or the tax burden. If a business undertaking cannot caity forward part of its tax losses, the cffc<.:ti' c tux rate will be higher than the one dctcm1incd by the tax legislution (i.e. rnrrcntly 28.59% in Luxembourg City): C';HT)' fonvard of tax losses Authorizi:d No t Authorized Year I FUR ( 1.000.000) ( 1,000.000) Yl.!ar 1 l:ur I,000,000 t,000,000 Year 3 EUR I,000.000 1,000,000 Ycur 4 EUR 1,000,000 1.000.000 Year 5 EUR 1,000,000 1,000.000 Ag~rrcgatc la\ rcsuh FUR 3,000.000 4.000,000 Nomu1al tax r:.11e 28.59~u 18 59~o Tax d11l' EUR 857.700 1.143.600 Efft ctivl' ta\ rate (in % ) 28.59 31U 2 D Legal vs. economic approach 15 A<.:cording to the current practice, the conditions to carry forward tax losses should be considered from a legal standpoint. This analysis has recently been strengthened by the outcome nf a judgment from the Tribunal Adrninistratif dated 6 july 2009 (11 '.!3982) regarding the "Manlelkauf' Gennan theory. 1 C<>IN'd J'Hal D Jllilkt 111~5 n.5473 P: u~in XV I pag~ 35:! 17 J I' Wm;u'IJ) " 111111,.. 1,J!icJll,.,mm111qm d l"<'f'<jrl rle.1 f>l!rt<'l "" drmt /heal lr1w111bo11ri:c m.< " IFA AI rr. Dtc ll focal lu\1. 1nh..1uri:l'\ 1,, I_ 1' rr Ju htlilln:.ik I' I FA~blll.1<1nl>q tlrg. 13ruylant 2UOX, p J W. 1 b Rcy;11\lit1g the p11."1:;.'\l1. 11cc uf 1.'l:onom1c tlwm 1~l11p tt\'l.'r kgal OWl'ncrship ~ 11-4 1 1' 1hc 1.uwml>uury AJ:1p1a1inn la" Jat1.-J Iii 01. 1ubc1 1 'll-1. 'i1c111:r.111p;.1.>>lllll!'l!1.~1. 11, Con,c1I d' Etat 15 July 1953 n1k n")'.!-1~. ~oc1c11. Natmnak J1.~ Ch1.1nm., de f1. r I u\1 ml>\1u1v1.i>h w1. al'" /\Jm1111st1a1Jvl.' Court, '.Ui June 2008, n"'.' I061C 1cg.1rding l'all 1.1ptwn' 011,har1.-:.. 111 F1mh:s l i>l.'.il1, n 811. M:11d1 l'l~'i. l.c l...:1slll1l<.:!l.ilt.'ql.uhc,il. Cado l\tack. J'nbun.11 AJ111111i,1r.1111' 11 Jul) 200'1. n"'.!39x2 (;m : pj>l."ji v.a, mtn>juc1.-<l) ~~-.:.1bo J I' Wmand> 4pf rc <1f/t11m "1J11tm!l'{ll<', / tcjn 1/.'n i' 1,', n.111111 (1k<1i f1111 111/k1111~c o1.1" IF\ /\I EF. Dml\ Ii seal Ju\1 111Q!!.111r.co1-, Llln:Jl!illl,1m J~ I Jh\ I uxc11!llij.y_a:. U11Jyla111 '.'00~. p 19?.1ml ''-''i ( I I )
16 In this dec1s1on. the judges held that the provisions of article 114 LIT!. should he appl ied in the light of the general principles of law according to which there 1s no room for interpretation where there is a clear legal provision. As mticle 114 LITL refers lo legal concepts. the economic approach. even if it nonnally pre\ ails in case of discrepancy with the legal anal ysis, should not apply as far as tax losses arc concerned. 17 As an appeal was introduced against this judgment, the solution held in this case has to be taken with caution. However, the debate (legal vs. economic) regarding which analysis should be applied in order to appreciate the conditions to carry forward tax losses is not decisive as both analyses will lead to entitle New Bank to carry forward part or all the tax losses incumxl before the partial division E Partial division and tax losses 18 fhc cu1tcnt position regarding the carry forward of lax losses is neither driven by a ~anct economic approach nor a strict legal approach. Indeed. under both methods the lramdcr of ta"< losses would have been possible. 19 The transfer of all assets an<l linbililics is ruled by company law without liquidation of the company which is the subject of the partial division. Assets and liabilities should he passed to the new company ("New Bank'') resulting from the partial division. Indeed, according to article :?.88 of the law dated Au!,rusl 10. IC) 15. paragraph I, as amended by article 28 of the law dated June I 0. 2009: (< l.a scissio 11 par constitution de 11011vellcs sncil!tes est I 'opcmtio11 par!aq11cllc llll<'.\ ocic;t(i (... ) trm1.y{erc, sa11s dissolt11ion, 11 111u ou p/11sieurs societh; 110111 c//emc111 co11stit11jc.\. 1111e partic 011 I 'e11se111blc de son patrimninc, actil'<'lll<.!11! er f)(l\'sivcmenl, 11w1 c1111a11t / 'aurih11tio11 ci.ws associh d 'actions 011 de parts des socii!tc's hh1c;ficiaircs ct. frc111uelleme11t. d '1111<' so11/f( C'n espc;ces m dcpassant pas I W',, de la \'Ulcur 11om111alc des actions 011 parts uttribuc;cs 011. ci dq(aut de l'(l/c>ur 110111i11alc. de l<'ur pair comptahle». 20 n1e traditional interprclation leads to applying a legal approach without recogni1.ing fully the legal effects. :?. I In order to fully follow the legal consequences of a panial division. the tax losses of the dcmcrged entity will he fully or partially transferred t<' the New Bank proportionally to the assets and liabilities transferred. 22 J\s a result, a similar reasoning as for individuals will be carried out (i.e. transfer of tax losses when the beneficiary was collcclivcly taxed with the transferor when the tax losses were incuncd) 22 Indeed: In ~ ll <: ol tw,,, 1111111 lx:ndi",1111..,, t.i- ln~,l..,,1n: 1r;in,fl.'1Too pro r.lla rhl ir nl'l11, n'""1d111µ t thl t"ir~u l.11 l.lit. 1 n 11-1 I J.tlL'll ' ' S.:ptcmli..:1 : <Ml-I ( 12)