While the notion of a group is not accepted in tax law, which recognises the independence of each company that is part of the group and recommends "normal" relations between parent and sister companies (similar to those between third parties), a group may optimise its tax management.
To achieve effective tax planning within a group, various techniques enable profits to be transferred from one company to another in order to cope with financial difficulties borne by one of the companies (parent, subsidiary or sub-subsidiary).
The choice of one method or another must above all be dictated by financial, business or strategic considerations rather than by the tax aspect alone.
In the event of failure to comply with legislation, the tax authorities can take action against the abuses of the forms and possibilities of civil law structuresand thereby levy taxes as would be the case under normal legal conditions.
Who is concerned?
Any group of companies can optimise its tax management by transferring profits between its various profit and loss-making companies.
How to proceed
Rentals or leasing
Within a group, a (profit-making) company can acquire equipment or buildings which it can then rent to another (loss-making) company in the group:
- the company which owns the asset may deduct reducing-balance depreciation and any loan interest but the rental payments will constitute taxable operating income;
- the renting company may benefit from lower rental payments (subject to complying with market prices in order to avoid an adjustment of the taxable profit) which will constitute deductible operating expenses.
It is also possible for a group to use leasing. However, as this is a regulated activity, use of which is restricted by legislation, this method of transferring profit can only be used if the group owns a company authorised by its corporate object to exercise this activity.
In a group, a loss-making company can temporarily hand over its business assets for lease management to another company in exchange for a lease payment.
In this scenario, the company that places its business assets under lease management will not be considered as ceasing its activity.
This technique for transferring profit has several benefits:
- the loss-making company which has become the lessor receives lease payments which can be offset against previous losses and does not pay any tax owing to current losses;
- the profit-making company which has become the lessee-manager can deduct the lease payments and the operating loss for the business from its profits.
When a debtor is in difficulty, a creditor can choose to waive the repayment by writing off all or part of the debt.
Debt write-offs of a business nature
A creditor may thus grant a debt write-off of a business nature to a company (including a subsidiary) with which it maintains a customer-supplier type business relationship in order to maintain its sales outlets or protect its sources of supply.
In such cases, the debt write-off constitutes, in principle:
- a tax-deductible extraordinary expense for the company granting it (the creditor);
- taxable extraordinary income for the company benefiting from it (the debtor).
However, if this debt write-off is granted with the aim of stabilising a company in difficulty, thereby increasing its value (i.e. it declares a profit following the stabilisation), the resulting net profit is tax-exempt.
Example: Company A records a loss of 30. Company B grants it a debt write-off of 80. Company A therefore makes a profit of 50. This profit of 50 is tax-exempt.
Debt write-off of a financial nature
In the context of intra-group relations, a creditor company which does not have a customer-supplier type business relationship with a group company which is in difficulty may grant it a debt write-off of a financial nature in order to improve its financial position.
In such cases, the debt write-off in principle constitutes an additional capital contribution (hidden contribution) which serves both to:
- increase the acquisition cost of shares held by the parent company in its subsidiary (recorded in the asset side of the balance sheet) and is therefore not deductible as an expense;
- and increase the financial value of the subsidiary by an amount equivalent to that of the debt write-off (recorded in the liabilities side of the balance sheet).
However, if this debt write-off does not increase the value of the company benefiting from it (i.e. its financial situation is still negative), both companies involved may carry out a value adjustment equivalent to the amount of the debt write-off; this value adjustment is deductible from the taxable income of the company writing off the debt.
Legal transformation of a subsidiary
It may be in the interests of a group of companies consisting of opaque capital companies to conduct a legal transformation of its subsidiaries into transparent companies in order to deal with a loss-making situation.
Indeed, taxation of transparent companies takes place at the level of the partners which include the profits and losses of their transparent subsidiaries in their personal taxable income, in proportion to their equity holding in said companies. The attraction of this fiscal transparency therefore lies in the de facto consolidation of the group's results, enabling:
- either a deduction of the subsidiaries' losses from the parent company's profits;
- or temporary non-taxation of the subsidiary's profits in the event that the parent company records losses.
The tax consequences of the legal transformation of a capital company into a transparent company may, however, be highly burdensome.
Who to contact
Luxembourg Inland Revenue (ACD)
Luxembourg Inland Revenue (ACD)33, rue de Gasperich L-5826 Hesperange LuxembourgVisit website: https://impotsdirects.public.lu/fr/profil/organigramme.htmlPlease consult the above website to find the competent department.
Related procedures and links
concernant l'impôt sur le revenu
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