Luxembourg Tax Alert 2024-02

On 5 March 2024, the Luxembourg administrative Court of Appeal (Cour administrative, 5 mars 2024, n°49365C [PDF], 49366C [PDF] and 49367C [PDF]) rendered a series of judgments (together, the “three cases” or the “cases”), all relating to the same issue surrounding the statistical classification of economic activities in the European Community (“NACE code”[1]) assigned by the National Institute of Statistics and Economic Studies of the Grand Duchy of Luxembourg (“STATEC”[2]). In all those cases, the Luxembourg administrative Court of Appeal (the “Court of Appeal” or the “Court”) confirmed the position sustained by the Luxembourg Administrative Tribunal (the “Tribunal”), which ruled that the NACE code attributed to the company by STATEC was consistent with its object, hence rejecting the taxpayer’s claim to have it replaced for another NACE code, supposedly more in line with its activity[3].

These three cases share the same fact pattern: As they have been pleaded by the same attorney, supported by the same arguments from parties, and resulted in the same conclusion from the Court, they will be analyzed jointly in this alert. Differences, where noteworthy, will be highlighted.

In those cases, the taxpayers were, respectively, two alternative investment funds (AIF) under the legal form of a société en commandite simple (SCS), and one investment fund under the legal form of a société en commandite spéciale (SCSp).

The companies contested the NACE code assigned by STATEC. The latter considered that those entities should be categorized as “Other collective investment undertakings” (Autres organismes de placement collectif) under the NACE code 64.309 while the companies argued that they should fall under the category of “Financial holding companies” (Sociétés de participations financières, “SOPARFI”) under the NACE code 64.202

The taxpayers subsequently requested the STATEC director to review their classification, but without success. As per the director’s explanations, any funds that do not take the form of investment companies with variable capital (SICAV), investment companies with fixed capital (SICAF), investment companies in risk capital (SICAR), or mutual funds (FCP) - whether regulated or not - should fall under the category 64.309.

For completeness, the director also added that the mere holding of financial assets on the balance sheet's assets side would not be sufficient to be classified as a SOPARFI. It would also be necessary (among other requirements) that the majority of the holdings be held at over 50% and belong to a clearly defined group of companies – which, he observed, was not the case here.

The cases were subsequently brought to the Tribunal, which ruled in favor of STATEC. Unsatisfied with the outcome, the taxpayers respectively lodged an appeal to the Court. 

As confirmed by both courts, the companies’ objects - as mentioned in their respective articles of association and referred to in their financial statements - should be the first element upon which STATEC should base its assessment. As these are public information, they are deemed to be accurate and up to date; thus, STATEC is not legally compelled to go beyond those items to further assess the companies’ situation and assign a NACE code accordingly.

These decisions contrast with another one, also published in 2023, which the taxpayers attempted to rely on[4]. In this case, the dispute revolved around the amount of the contribution determined by the Chamber of Commerce.  The taxpayer, which was an AIF under the legal form of an SCS, attempted to lower the amount of contribution it would be liable to, on the grounds of the absence of any commercial income. It did so successfully, as the Tribunal concluded that it was not established that the taxpayer generated income that could be classified as commercial profits within the meaning of Article 14 LITL. It consequently ruled that the amount of the plaintiff company's annual contribution - computed by the Chamber of Commerce – was incorrect.

The three cases are structured in identical fashion.

In particular, it addresses the argument raised by all three taxpayers according to which their classification in the category Other collective investment undertakings directly subjects them to the degressive contributions of the Chamber of Commerce, calculated based on commercial profits:

• In the cases where the taxpayers were AIFs, they raise that, as per Article 14 LITL supported by its related circular of 2015, where an AIF is constituted in the form of a limited partnership or a special limited partnership, it would be deemed not to carry out a commercial activity due to not having a commercial purpose, but an investment purpose.
• In the three cases, taxpayers emphasize that they primarily engage in intra-group transactions, so there would be no dealing with third parties outside the group. Their activity, insofar as it consists of the collective investment of all funds available to it in a wide range of securities and assets, mainly in stocks and interests, as well as in the holding and management of these interests, would not constitute a commercial activity as it does not exceed the scope of private wealth management.
• In the three cases, they also argue that in order to be considered as engaging in a commercial activity (i.e., commercially tainted, théorie de l’empreinte commerciale), their general partner would be required to be a capital company holding at least 5% of its interest units, which is not the case as the latter hold less than 5% of its interest units.
• In the three cases, they also invoke the fact that their entities are limited partnerships, fiscally transparent, and therefore their income would not be taxable in their name but only at the level of their partners, who are not residents in Luxembourg.

The judge recalls that the litigious question is whether STATEC had appropriately classified the taxpayer under the NACE code number 64.309 referring to Other collective investment undertakings.

The Court thus rejects the taxpayers’ claims and confirms STATEC’s NACE classification.

Following this judgement, our immediate recommendation would be to draft with care articles of association when establishing an SCS or an SCSp, in particular those relating to its object, bearing in mind the potential implications they may have later on the annual contribution due to the Chamber of Commerce.

As mentioned above, the outcome of the decision is surprising, given the fact that the Tribunal ruled the opposite in a similar case (as referred to above)[5], where the Chamber of Commerce’s computation of the contribution was challenged.

The fact that no appeal has been lodged by the Chamber of Commerce in the above case[6] suggests that the latter does not contest the heightened requirement imposed upon it by the Tribunal.

As a result, although the two issues (i.e. challenge on the computation of the contribution or challenge on the NACE classification) may be linked, it appears important to consider these cases when drafting articles of association for such entities. Moreover, it is advisable, in the event of a dispute, to challenge the assessment issued by the Chamber of Commerce rather than the NACE classification made by STATEC.

Nevertheless, exercising caution and awaiting future case law to hopefully provide clarity on this matter is recommended. Given the increasing number of challenges, the wait should not be too long.