Luxembourg Tax Authorities provide clarifications on the tax treatment for dissolutions of companies without liquidation
On 19 July 2024, the Luxembourg Direct Tax Authority issued a new circular (the Circular) that clarifies the tax treatment for dissolutions without liquidation, also known as the short-form dissolution. Our legal guide on voluntary dissolution/liquidation in Luxembourg can be found here.
Background on short-form dissolutions
The term “dissolution” refers to the decision to terminate a company’s legal existence. The short-form dissolution procedure is quicker than its long-form counterpart, and can only be implemented where there is a single shareholder. With the short-form dissolution, from a legal perspective the dissolution is not followed by a liquidation process, where the dissolving company’s assets are realised, its liabilities settled, and any available residue distributed to the shareholder(s). These assets are therefore not realised but transferred, by operation of law, to the sole shareholder. From a tax perspective, however, the short-form dissolution is generally considered a tax triggering event.
Key Clarifications
- Corporate Income Tax and Municipal Business Tax
The Circular specifies that a short-form dissolution is treated as a transfer of corporate assets (similarly to a liquidation) which generally triggers taxation on any unrealized gains.
However, the Circular clarifies that a short-form dissolution should be assimilated to a merger and therefore may also benefit from the tax neutral regime available to merger (if certain conditions are met – notably if there is a guarantee that unrealized gains would be taxable in Luxembourg in the future). This means that the short-form dissolution may be neutral from a Luxembourg tax perspective
- Net Wealth Tax Reserve
Luxembourg companies can allocate a portion of their previous year profits to reduce, within certain limits, their net wealth tax position. This net wealth tax reserve must be kept for five years.
In the case of a short-form dissolution, it is possible that the five years period would not be met. In this respect, the Circular specifies that the net wealth tax reserve must be constituted at the latest upon the dissolution and that the shareholder can continue the special reserve hence not interrupting the five-year period.
The Circular however expressly provides that for other types of liquidations the special net wealth tax reserve cannot be continued after the liquidation closure.
Conclusion
The Circular provides important clarifications on the tax implications on short-form dissolution confirming that it can be conducted in a tax neutral manner (under specified conditions).
The Circular can be found here.
