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NWT reserve against freedom of establishment principle - 11/09/2012


The ECJ issued a decision in a case involving the article 8a of the Luxembourg Net Worth tax (NWT) law. The Finanziaria di Diego della Valle (FDV) case (C-380/11) deals with the legality of the conditions allowing a tax reduction for the company creating and maintaining a tax reserve for a five year period in its commercial accounts. The Luxembourg Administrative Court requested a preliminary ruling from the ECJ on 18 July 2011.

In the case at hand, the taxpayer is a private limited liability company (Sàrl). He had established a blocked reserve and benefited from the above reduction for 2004. In 2006, the register seat was transferred in Italy and the company subsequently merged with an Italian company. However, the funds were still allocated in a reserve in the balance sheet. Following to the migration, the Luxembourg Tax Authorities considered that the taxpayer does not meet any more the requirements to benefit from the NWT reduction. Indeed, the company was no longer Luxembourg resident and thus no longer subject to NWT during the five year period. Therefore, the previously relief given was recaptured and the tax reduction for 2005 and 2006 was also denied by the Tax Authorities.

The ECJ concluded that Luxembourg law violated the freedom of establishment principle (article 49) of the Treaty on the Functioning of the European Union. Indeed, the Court noted that the a Luxembourg company transferring its seat outside the Grand-Duchy, during the five year period following the year where the tax relief was granted, is subject to a less favourably treatment than a company remaining Luxembourg resident. Such difference of treatment may have negative impact repercussion on the assets of companies wishing to transfer their seat towards another Member State and may discourage it to move before the end of the five year period.

The ECJ further analysed if such violation may be justified by overriding reasons in the public interest.  The first argument of the Luxembourg Government was that such restriction was justified by the protection of the balanced powers of taxation between the Member States. Although such objective may be recognized as legitimate by the Court (C-371/10, National Grid case), it cannot be evocated as argument in circumstance such as those of the main proceedings.

Moreover, the restriction at the issue cannot also justify by the need to ensure the coherence of the national tax system (C-204/90, Bachmann case). This argument was denied because there is no direct link between the tax relief concerned and the objectives pursued by the Luxembourg legislation, and in particular the fact to offset the relief granted by additional revenue from corporate income tax and municipal business tax during the years where the reserve is maintained.

Finally, the Court rejected as potential argument the aim pursued by that Luxembourg legislation (see above). Indeed, increase and maintain the tax revenues cannot be considered as an overriding reason in the public interest (C-264/96, ICI case
C-397/98, Metallgesellschaft case

The conclusion of the Court that the NWT reserve rule violating the freedom of establishment principle is fitting into the scheme of its previous decisions (e.g. C/9/02 Latseyrie du Saillant case). It should be reasonable to assume that the five year condition would be in a near future abolished by the Luxembourg Government if the NWT reserve want carry on with its story.

Should you have any question regarding this matter, please feel free to contact us.

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