René Beltjens, Partner
Business Review, September 2006
The European Commission has ruled that the preferential tax regime known as the “1929 holding company regime” constitutes state aid in breach of EC legislation (decision dated 19 July 2006). As a consequence, this regime has to be repealed or amended by the end of the year. A longer phasing-out period is nevertheless available for existing 1929 holding companies.
This decision concludes a six year investigation procedure. Although it condemns one of Luxembourg’s oldest regimes, it neither puts an end to Luxembourg holding companies altogether, nor jeopardises the position of Luxembourg in international structuring.
Progressive phasing out
The benefits of the 1929 holding company regime can no longer be granted to new beneficiaries. Then, the Luxembourg government will abolish the regime (by 31 December 2006 at the latest). Existing 1929 holding companies will nevertheless continue to benefit from this favourable tax regime until 31 December 2010, subject to the proviso that their capital is not transferred. Following governmental statements, companies incorporated before 1st August 2006 should benefit from the transitional period (even though the Commission’s decision refers to the cut-off date as the date of notification of its decision).
Scope of the decision
The decision of the Commission covers ordinary 1929 holding companies, as well as derivative regimes, i.e. billionaire holding companies subject to the grand ducal regulation dated 17 December 1938 and financing holding companies regulated by an administrative decision dated 9 September 1965. On the other hand, the decision does not affect holding companies operating under the general regime, i.e. the “Soparfis”, which are subject to the normal corporate tax regime but benefit from the participation exemption regime on dividends and capital gains.
The decision of the Commission concerns an estimated 14,000 companies. In our opinion, the vast majority of these companies are held by individuals rather than international groups, since international groups usually chose Soparfis instead of 1929 holding companies in order to benefit from tax treaties and EU tax directives.
Impact of the decision
The Commission’s decision has no retroactive effect; in other words, beneficiaries of the regime do not need to repay the state aid deemed to be received. Existing companies can therefore continue to enjoy the benefits of the regime until 31 December 2010.
Even though the Commission’s decision could have been challenged or could have resulted in an amendment to the 1929 holding company regime, the Luxembourg government has decided to repeal the regime in order to avoid legal uncertainty for all business parties involved. Based on the same argument, all interested parties are, at the time of writing, waiting to hear the details of this phasing-out process, which should be designed in such a way that it avoids undue consequences.
Clearly, the transitional period has been granted, in the light of the longstanding nature of the regime and the related expectations of all interested parties, to enable reorganisation and avoid any adverse impacts that an overnight elimination of the regime would undoubtedly have had. It seems fair to impose restrictions to avoid the trading of existing 1929 holding companies, which would unduly extend the benefit of the transitional period to new investors. But these restrictions should not challenge the legal certainty. Restrictions should be limited to abusive situations, e.g. where there is a change of control over the company with the main purpose being the buyer benefiting from the 1929 regime. On the contrary, in our opinion, non-abusive situations, e.g. transfers of shares of listed companies, intra-group transactions as well as transfers within a family context, should be out of the scope of the restrictions. This interpretation seems in line with governmental statements (quite clearly as concerns listed companies).
In practice, other questions arise as to how these restrictions will be monitored, especially considering bearer shares. Subsequent difficulties in determining the tax status of the company will not only concern the company, its directors and shareholders, but also auditors (who have to verify that accounts comply with the principle of a true and fair view, taking tax provisions into account).
Future
The Luxembourg government has announced its intention to introduce an alternative regime for private wealth management in compliance with European legislation. Foreign experiences could serve as a guide for the new vehicle. Due to EU constraints and considering that it will be geared towards individuals only, this new vehicle will not offer a complete alternative to 1929 holding companies. However, as concerns multinational companies currently using 1929 holding companies, Luxembourg does offer other opportunities within the existing tax and legal framework.
