TAX UPDATE 05 Jun 2020 The Ashurst Tax team represents taxpayers in the eagerly awaited B and others case (C-749/18) before the CJEU

On 14 May 2020, the Court of Justice of the European Union (CJEU) issued its eagerly awaited judgment in the B and others case (case C-749/18) dealing with three preliminary questions raised by the Luxembourg administrative Court in relation with the Luxembourg fiscal unity rules.

Facts and background

Following the SCA Group Holding decision by the CJEU (joint cases C-39/13, C-40/13 and C-41/13), Luxembourg amended its tax legislation to allow the "horizontal" fiscal unity between qualifying Luxembourg sister companies of an EU/EEA non-integrating parent company. Since 2015, Luxembourg taxpayers have therefore the choice between the vertical and the horizontal regime when establishing a fiscal unity for corporate income tax and municipal business tax purposes. While the results are aggregated at the level of the Luxembourg integrating parent company in a vertical fiscal unity, in a horizontal fiscal unity such results are aggregated at the level of a Luxembourg integrating subsidiary of the non-integrating parent.

Incompatibility of the Luxembourg pre-2015 fiscal unity rules with EU law 

In line with its SCA Group Holding decision, the CJEU ruled that the fiscal unity rules as applied in Luxembourg until 2015 were infringing EU law as a group of taxpayers with a foreign parent company was treated less favorably than a group with a Luxembourg parent company. Based on the EU freedom of establishment, Luxembourg is not allowed to preclude the tax integration of the resident subsidiaries of a non-Luxembourg resident EU parent company, while offering this possibility to a Luxembourg parent company together with its Luxembourg subsidiaries.

Luxembourg tax legislation has been amended as from 2015 to introduce a horizontal fiscal unity regime. The impact of the 14 May 2020 decision should therefore be limited in relation to this point.

No automatic dissolution of an existing fiscal unity in case of extension to a horizontal fiscal unity 

Current Luxembourg tax legislation provides, in essence, that an existing vertical fiscal unity will be dissolved before entering into a horizontal fiscal unity. The dissolution of a fiscal unity may have various adverse impacts, notably if it occurs within the first five years of its existence. No such dissolution would occur in case a vertical fiscal unity with a Luxembourg integrating parent company is extended by adding subsidiaries of such parent to the existing fiscal unity. 

The CJEU ruled that Luxembourg provisions infringe the freedom of establishment by requiring a dissolution of the vertical fiscal unity when taxpayers are extending it to a horizontal fiscal unity, provided the integrating entity remains the same. 

The CJEU decision should end the restrictive application of the Luxembourg fiscal unity rules. To the extent that the integrating entity remains identical, taxpayers should indeed be allowed to extend an existing vertical fiscal unity by including notably sister companies of the integrating entity (provided that all other legal requirements are met).

Requirement to file a fiscal unity request before end of fiscal year

A fiscal unity request has to be filed with the Luxembourg tax authorities by the concerned taxpayers (for a horizontal fiscal unity: the integrating entity, the integrated entities and the non-integrating parent) at the latest before the end of the fiscal for which the fiscal unity should first apply. 

The CJEU was asked to judge whether the requirement to file the fiscal unity request within such deadline is in line with EU law, considering notably that:

• the fiscal unity (extension) request would have had to be filed by the taxpayers before any relevant decision is taken by the CJEU,
• the taxpayers knew that such request would have been refused by the competent tax authorities,
• such refusal would very likely have been confirmed by the competent domestic courts (in light of existing Luxembourg case law on the topic).

It follows from the CJEU decision that the EU principles of equivalence and effectiveness do not prohibit the legislation of a Member State which requires a fiscal unity request to be filed with the competent tax authorities before the end of the first tax year for which the application of this regime is requested, notwithstanding the above considerations. One might wonder if the rationale of the CJEU decision might lead taxpayers to file "preventive" requests - while knowing that such requests will be refused by the competent authorities and domestic courts - so not to jeopardise their access to obtain a (tax) regime if, in the future, the legislation of a Member State is considered as not in line with EU law.

The case will now return to the Luxembourg administrative Court. Several aspects might remain to be clarified. 

Our team is at your disposal should you have any questions with respect to the Luxembourg fiscal unity rules. Please do not hesitate to contact us.