“Control Premium A”, hereinafter referred to as “company (A)”, is part of a Portuguese group and all of its share capital was held by the limited company (B), hereinafter referred to as “company (B)”.
Company (B) sold 45% of the shares in company (A) to the following companies incorporated under Portuguese law:
– company (C), representing 17.74% of the capital and voting rights of company (A) ;
– company (D), representing 18.16% of the capital and voting rights of company (A);
– company (E), representing 9.10% of the capital and voting rights of company (A).
On the same day, company (A) acquired 48,726,550 shares under share purchase and sale agreements for a sale price of ….. -per share of the Portuguese company (F), representing 55.06% of the share capital, of companies (B), (C), (D) and (E), so that it became the majority shareholder of company (F), the said sale price still being subject to revision in the event that a higher or lower price resulted from a public takeover bid on 12 February 2014.
By amendments to the aforementioned contract of sale on 19 March 2014, and following the takeover bid of 12 February 2014 for the remaining 39,773,450 shares in the company (F), the price of one share was revised downwards, to …. and a capital increase took place with the creation of 7,042,254 new shares subscribed to by the general public, so that the final total acquisition price of the shares of company (F) by company (A) was ….-€ (… x 48,726,550), representing 51% of the share capital of company (F).
On 15 October 2014, company (A) sold its 51% shareholding in company (F), corresponding to 48,726,550 shares, to the third-party company (G) SA, hereinafter referred to as “company (G)”, a Portuguese subsidiary of the Chinese group …, at a price of …. -€ per share, namely for a total amount of ….-€ (… x 48,726,550), with the result that company (A) realised a gross book gain of ….-€ on the sale of the shares in question, which was recognised in the profit and loss account of the business accounts for the 2014 financial year.
On 15 April 2015, company (A) submitted a request for an advance ruling to the tax office, with a view to the recognition of a hidden contribution at the time of the acquisition of the shares in company (F) on 23 January 2014, in that the value of the shares in company (F) would in fact have been higher than the price paid by it – due to an added “control premium” – so that the capital gain realised for accounting purposes would be non-existent from a tax point of view.
On 10 July 2018, the tax office informed company (A) that it intended to deviate from the tax return as filed. The letter was worded as follows:
“The tax office … is of the opinion that the price initially paid, i.e. … per share, does indeed reflect the arm’s length principle. Indeed, at the time of the IPO on 12 February 2014 of 49% of the share capital of (F) S.A., the value of these shares, intended to be sold to the general public, was set at € …per share, i.e. at a price that a third party was prepared to pay without a control premium. As a result, the tax balance sheet submitted was rejected and tax was levied on the commercial balance sheet in accordance with article 40 of the amended law of 4 December 1967 on income tax (L.I.R.). The capital gain realised, which does not fall within the scope of the Grand-Ducal regulation of 21 December 2001 implementing Article 166, paragraph 9, number 1 L.I.R., is therefore fully taxable. […] “.
Company (A) lodged a complaint with the Director of Direct Taxes, which by a decision dated 17 July 2019 rejected the claim as unfounded.
An appeal was then filed by Company (A) with the Administrative Tribunal.
Judgment of the Tribunal
The Tribunal rejected the claims in the appeal as unfounded and upheld the decision of the Director of Direct taxes.
Excerpt
“Considering that it should be emphasised that the … group had already held the majority of the share capital of the company (F) prior to the transfer of the shares on 23 January 10 2014; that following the sale on 23 January 2014, there was no change in the majority of the shares held by the … group, the only difference being that the … group held the majority of the share capital of the company (F) prior to the transfer of the shares on 23 January 10 2014. group, the only difference being that the claimant has since held the majority of the shares in company (F) in place of companies (B), (C), (D) and (D); that in view of the majority control of company (F) within the … group, even well before 23 January 2014, there is no reason why, all of a sudden, a control premium should be recognised as a hidden contribution for the claimant, unless it is for purely tax reasons;
Considering that, in the present case, the production of a transfer price study with an estimate of a control premium is to be declared irrelevant given that the … group was already the majority shareholder in the company (F) before the transfer of the 48,726,550 shares on 23 January 2014;
Considering that, on the contrary, the claimant’s assertion that “a control premium should be taken into account in calculating the acquisition price” is even contradicted by the fact that when the 48,726,550 shares were resold to a company that was a third party to the … group, no control premium was charged by the claimant;
Considering that it sold to a Chinese investor, through the intermediary of the Portuguese company (G), all the shares in the company (F), thus representing the majority of the capital of the company (F), at the stock market price without, however, requesting any control premium; that it emerges from a consultation of the stock market prices relating to the year 2014, that one share in the company (F) had a value of … euros on 15 October 2014; in the event that the assumption of a control premium put forward by the claimant proved to be correct, it would have been incumbent on it to re-invoice the new majority shareholder for this control premium in addition to the sale price of … per share, which however it did not do; it is therefore clear that a control premium simply did not exist, either at the time of the acquisition of the 48,726,550 shares on 23 January 2014, or at the time of the sale of these same shares on 15 October 2014; the capital gain on the sale at issue is nothing more than the result of fluctuations in the share price of the company (F) ;
Considering that the tax office made a correct assessment of the facts and that it was right to refuse the hidden contribution of … euros as claimed by the applicant ;
Considering that the Grand-Ducal Regulation of 21 December 2001 implementing Article 166, paragraph 9, no. 1 L.I.R. states in Article 1, paragraph 1° that when a taxpayer referred to in Article 166, paragraph 1, nos. 1 to 5, disposes of securities of a direct holding held in the share capital of a company referred to in paragraph 2, nos. 1 to 3 of the same article, the income generated by the disposal is exempt, if, on the date of the transfer of the securities, the transferor holds or undertakes to hold the said holding for an uninterrupted period of at least 12 months and if, throughout this period, the proportion of the holding does not fall below the threshold of 10 per cent or the acquisition price below 6.000,000;
Considering that the claimant acquired the 48,726,550 shares in the company (F) on 23 January 2014; that she resold them on 15 October 2014, so that the condition of holding them for an uninterrupted period of at least 12 months is not met; that, as a result, the capital gain in the amount of … euros is fully taxable;
Considering, superfluously, that the claimant has booked tax provisions for a total amount of … euros; that these tax provisions are almost equal to the sum of the local authority income tax of … euros and the local authority business tax of … euros appearing in the respective tax statements; that it must be accepted that the claimant expected to be taxed on the capital gain from the sale in question, even though she attempted to avoid such taxation by invoking the theory of the control premium;
Considering that for the remainder, the taxes are in accordance with the law and the facts of the case and are not otherwise challenged;
FOR THESE REASONS
accepts the claims in form, rejects them as unfounded. […] “.”
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