On 9 December 2020, the Luxembourg Administrative Tribunal rendered a decision relating to the refund of the Luxembourg 15% withholding tax (“WHT”) on dividends distributed by several Luxembourg corporate entities to another Luxembourg company (the “Company”). In short, the Tribunal estimated that the Company did not demonstrate that the conditions for the refund were fulfilled, in particular those having regard to the beneficial ownership, and confirmed the denial of the refund.
The Luxembourg Income Tax Law conditions the exemption of WHT to (among other) the detention of a minimum participation of at least 10% (or with a minimum acquisition price of 1,2 MEUR) held during a 12-month period. In the case at hand, whereas the Company provided several supporting documents including daily position reports, audited annual accounts or copies of tax returns, the Luxembourg tax authorities considered that the Company failed to establish its status as beneficial owner of the shares during the said 12-month period.
The dividends were paid in relation to fungible and dematerialized shares. The processing of such dividend payment usually requires the intermediation of several intermediaries, notably including a paying agent and a custodian agent. Such intermediation results in a chain of payments where each provider is not aware of the identity of the actual owner of the shares. In this context, the tax authorities were asking for a documentation allowing the reconciliation between the payments made by the paying agent and those received by the Company as shareholder - in other words a documentation substantiating the entire chain of payments. According to the tax authorities, a very cautious analysis of the WHT refund request was justified due to the recently revealed Cum-Ex fraud scheme, in which bad actors were claiming several refunds of WHT for one and same distribution.
In the case at hand, the Company had provided “tax vouchers” issued by one of the intermediaries. These were however disregarded by the tax authorities and considered as an insufficient proof because they were not mentioning the identity of the Company as beneficial owner nor the holding period of the shares.
In its decision, the Tribunal acknowledged that the burden of proof of the facts triggering the tax liability belongs to the administration but the burden of proof of the facts reducing or releasing the tax liability belongs to the taxpayer. Moreover, while not expressly mentioned in the Luxembourg Income Tax Law, the Tribunal also confirmed that only the beneficial owner of the shares was entitled to the exemption and refund of the WHT and therefore, that the fulfillment of this condition had to be demonstrated by the Company.
The Tribunal considered that most of the documents provided by the Company were self-generated, whereas the fulfillment of the conditions for the exemption needs to be proved by the provision of objective elements. Regarding the “tax vouchers”, the Tribunal noted that these were addressed to the Company, with a mention of the number of shares, the amount of the dividend, as well as the date of the payment with mention of a bank account. The Tribunal considered however that they were lacking an indication of the beneficial owner and holding period of the shares, as well as the required double signature.
One argument of the Company was that the documentation requested was impossible to obtain given the complexity of the chain of payments and taking into account that most intermediaries actually ignored the identity of the beneficial owner. The Tribunal considered here that the Company did not sufficiently demonstrate that it had taken steps aiming at obtaining the relevant documentation, or to which extent those steps had proven to be unsuccessful.
For these main reasons, the Tribunal decided to confirm the decision of the Luxembourg tax authorities to deny the refund of the WHT. An appeal against this decision has been filed.
Although rendered in a specific context, where other elements were also taken into consideration by the judges, this case law gives an indication on the crucial importance for taxpayers to maintain an appropriate WHT related documentation in order to demonstrate their quality of beneficial owner - or, when not possible, their inability to do so.
Such considerations may apply to WHT refund requests made under Luxembourg domestic provisions, but also to those made based on double tax treaties’ provisions.
In Luxembourg, WHT refund claims usually need to be introduced by the end of the year following the payment of the WHT (subject to double tax treaty provisions).
If you wish to discuss these topics, please contact: Tiberghien, Luxembourg
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