Luxembourg vs PPL-Co, July 2017, Cour Administrative, Case No 38357C

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The Administrative Court re-characterised a profit-participating loan into equity for tax purposes.

The court provided the following reasoning:

    “Compared with the criteria specified above for a requalification as a disguised contribution of capital, it should firstly be noted that the sums made available to the two subsidiaries were allocated to investments in properties intended in principle to represent investments in the medium or long term as assets of the invested assets and in the absence of a clause providing for a repayment plan or a fixed maturity, the sums were intended to remain at the disposal of the subsidiaries for a period otherwise limited. In addition, this availability of funds did not give rise to any fixed consideration from the two subsidiaries, but only to a share of the appellant in the capital gains generated by hotel disposals, this interest amounting to three quarters of the capital gains obtained by the affiliates.”

    “...the sums made available to the two subsidiaries by the appellant were not, as a financing from a lender seeking to recover the capital lent, but as a risk-oriented investment. on the value gains of the hotels financed through the two loans, so that these sums are to be assimilated to cash contributions to the subsidiaries and that the normal way of making these sums available would have been the capital increase. Since there is no other particular economic interest justifying the replacement of capital contributions by loans arising from the elements in question or not put forward by one of the parties, it must be concluded that the essential tax interest consisted in the deduction of ” participating interests ” by the subsidiaries in the Dominican Republic as expenses in relation to the taxable gains from affiliates.

    The evidence presented to the Court thus allows the conclusion that the appellant’s claims under the two loan agreements in question are subordinate. In any case, whether the loan is subordinated or not is only one of several factors to be taken into account in the context of the overall analysis if it corresponds to the normal route of financing dictated by serious economic or legal considerations, analysis that the court should have made instead of focusing on the only question of whether or not subordinated loans are cause.

    …it must be concluded that, in view of the conditions to which they were granted, the loans at issue in fact amount to disguised capital injections in addition to the shareholdings…thus qualify as participating in the share capital of these companies within the meaning of § 60 BewG.

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    LUX vs LuxCo 260717 COUR ADMINISTRATIVE Case No 38357C

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