The supreme administrative court confirmed the time-limits for the filing of dividend withholding tax reclaims in Luxembourg. The court overturns the current administrative practice and overruled the first-tier administrative tribunal.
In Luxembourg, a refund claim must be filed by the end of the year following the year in which the events giving rise to the claim occurred.
In its judgment, the court clarified that the claim for refund of dividend withholding tax arises only after the end of the twelve-month holding period (a pre-condition for the Luxembourg withholding tax exemption). The refund claim must then be filed by the end of the year following the year in which this holding period ended.
Luxembourg withholding tax exemption
Dividend distributions from certain Luxembourg companies may be subject to 15% withholding tax, unless an exemption under Luxembourg law applies or a reduced rate, even exemption, applies under a double tax treaty. No withholding tax is due on interest or royalty payments in Luxembourg.
A full exemption from dividend withholding tax under domestic law is available, provided that the beneficiary maintained, on the date of the dividend distribution, during an uninterrupted period of at least 12 months a direct participation of at least 10% in the share capital or at least an acquisition price of EUR 1.2 million in the distributing Luxembourg subsidiary. The scope of the withholding tax exemption is broad and generous: Not only EU-resident parent companies may benefit, but also parent companies resident in a treaty country (like the US), in Switzerland, Norway, Iceland and Liechtenstein.
The holding period of 12 months can be met prospectively, if the beneficiary commits to maintain a shareholding of at least 10% respectively EUR 1.2 million going forward during an uninterrupted period of at least 12 months. This commitment can be made in the withholding tax return that must be filed within eight days of the profit distribution. If there is no specific date indicated for the dividend distribution, the day following the board decision is decisive. Within eight days, withholding tax must be levied and paid to the Luxembourg tax authorities. The distributing company shall be personally liable for the withholding tax.
For dividend distributions during the first 12 months after acquisition or incorporation, taxpayers generally claim the withholding tax exemption and commit to maintain a shareholding of at least 10% respectively EUR 1.2 million going forward.
Luxembourg court decision
In a final decision of 20 September 2018, the court overruled a judgment rendered by the administrative tribunal.
In November 2012, a UK company acquired shares in a Luxembourg subsidiary. In December 2012, the Luxembourg company distributed dividends to its UK parent. At that time, the percentage of the shareholding by the UK parent was unclear and the UK parent was not yet committed to holding the shares for more than 12 months. The Luxembourg withholding tax exemption could thus not be claimed at this point in time. Therefore, the Luxembourg subsidiary withheld 15% of the gross dividend and paid it to the Luxembourg authorities.
By November 2013, it became clear that the UK parent has held the Luxembourg subsidiary during an uninterrupted period of at least 12 months with a direct participation of at least 10% in the share capital.
Hence, in 2014, the UK parent filed a withholding tax refund claim. However, the Luxembourg authorities dismissed this claim. They stated that the claim was time-barred. In their view, the claim should have been filed until 31 December 2013.
The court ruled in favor of the taxpayer and held that the withholding tax refund claim was filed in due time.
A refund claim must be filed by the end of the year following the year in which the events giving rise to the claim occurred.
While the tax authorities claimed this event to be the dividend distribution in December 2012, the UK company identified the end of the twelve-month holding period in November 2013 as the relevant event.
The court ruled in favor of the taxpayer and held that the end of the twelve-month holding period constitutes the event that gives rise to the refund of the withholding tax. At the time of the dividend distribution, the UK parent actually held a direct participation in the Luxembourg subsidiary of more than 10%. Thus, it was the compliance with the holding period of uninterrupted 12 months that qualified the UK parent for a refund of the withholding tax. In the case at hand, the refund claim of the UK parent thus originated in November 2013. Consequently, the filing deadline for the refund claim was the end of the following year, i.e. 31 December 2014.
KPMG Luxembourg comment
This is a taxpayer-friendly decision. For cases in which the conditions for the withholding exemption are not met upon the dividend distribution, it is now clear that taxpayers have an additional year for filing the refund claim than the hitherto administrative practice.
Companies which are currently facing a similar tax controversy should safeguard their taxpayer´s rights. KPMG Luxembourg can assist you with applying the right legal remedies at the right time. In general, taxpayers have three months to appeal administrative decisions.
KPMG Luxembourg can also assist you with applying for a reduction at source and filing withholding tax reclaims in all countries that infringe EU law, tax treaty regulations and domestic law by applying a discriminatory tax treatment to cross-border dividend distributions.
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