For tax losses arising since the year 1991, the Luxembourg tax law provides in Article 114 Luxembourg Income Tax Law (LITL) the possibility of an unlimited loss carryforward until December 31, 2016.
Tax losses arised as of January 1, 2017, are only valid for a limited time period of 17 years. Tax losses arised until December 31, 2016, however, can still be carried forward for an unlimited time period. The use of tax losses is subject to the so-called “FIFO” principle (First In, First Out).
The deductibility of the (tax) loss carryforward is subject to the following conditions: First, under Article 114 (2) 1 LITL, only tax losses that could not be offset with other income in the tax year in which they were arised can be considered. In addition, under Article 114 (2) 2 LITL, the taxpayer must have duly maintained books during the tax year in which the losses were caused. Furthermore, Article 114 (2) 3 LITL states that only the person who caused the tax loss may benefit from it. It follows that the company which wishes to carry forward or deduct the losses and the company which has caused the (tax) losses must be an identical person. According to prevailing opinion, the identity of the company had to be judged according to legal and economic aspects. In practice, German tax law has often been used to interpret Article 114 LITL. German jurisprudence is often relevant in interpreting Luxembourg tax rules, since a large part of the Luxembourg tax laws are derived from German tax law and many regulations are still valid until today.
There are two important judgments on the use of loss carryforwards in Luxembourg.
The Luxembourg Administrative Court issued a judgment on the use of loss carryforwards on July 6, 2009 (Jugement de tribunal administratif, 6 Juillet 2009, No. 23982). This judgment provides a clarification with regard to the deductibility of losses in the case of a change of shareholders and in the event of changing economic identity of the company (so-called Mantelkauf). According to the judgment of July 6, 2009, this is to be judged according to aspects of corporate law and not according to economic criteria.
The other judgment was issued by the Luxembourg Administrative Court on 15 July 2010, which upheld the judgment of the Administrative Court of 6 July 2009 (loss carry forward by Mantelkauf) at appeal (Cour Administrative du Grand-Duché de Luxembourg, no. 25957Ca, published on August 6, 2010). In this judgment, the appellate court joined the reasoning of the lower court. The Verwaltungsgerichtshof emphasizes in this context that the possibility of loss carry forward does not favor the taxpayer, but a necessary correction of the sectoral taxation in order to comply with the taxpayer’s performance principle. However, the Administrative Court independently raises the issue of abuse of rights. This could be “if the legal and tax identity of the company were used exclusively to circumvent the personal nature of the right to loss carry-over and the prohibition of transfer for the sole purpose of using the loss carry-forwards and avoiding the taxation of the associated profits”.
In the opinion of the court, evidence of a legal abuse may in principle be a task of the previous activity, whereby the company does not have any relevant business assets, as well as the sale of the company’s shares to new shareholders and the subsequent commencement of a new (profitable) activity.