ECJ decision enhances Luxembourg as prime location for asset finance deals

The European Court of Justice rendered a decision on 22 December 2010, which is likely to lead to the increased attractiveness of Luxembourg for investment banks involved in asset finance transactions¹. Also, industrial and commercial players may benefit from the decision.

Issues at stake: scope of the Luxembourg investment tax credit

According to Luxembourg domestic tax law (article 152bis of the Luxembourg Income Tax Law, “LITL”), a tax credit (“bonification d’impôt pour investissement”) is granted to Luxembourg taxpayers investing in certain eligible assets, which meet i.a. the following conditions:

• They are physically operated in Luxembourg (except for shipping vessels operated in international traffic),
• They are made within a Luxembourg business establishment, and
• They are intended to be used permanently in Luxembourg.

In the case at hand, the Luxembourg tax authorities disallowed the right of a tax credit for investment to a Luxembourg company, which owned shipping vessels used in the harbours of Antwerp and Amsterdam (but not in international traffic) on the ground that they were not used in Luxembourg. The Administrative Tribunal of Luxembourg decided on 10 June 2010 to refer to the European Court of Justice whether such condition is in breach of the freedom to provide services (article 56 of the Treaty on the Functioning of the European Union, “TFEU”) and the free movement of capital (article 65 TFEU).

According to the European Court of Justice decision, the current scope of application of the Luxembourg investment tax credit is contrary to the freedom to provide services.

In its judgment dated on 22 December 2010, the European Court of Justice ruled that “article 56 TFEU is to be interpreted as precluding a provision of a Member State pursuant to which the benefit of a tax credit for investments is denied to an undertaking which is established solely in that Member State on the sole ground that the capital goods, in respect of which that credit is claimed, are physically used in the territory of another Member State”. Therefore, the requirement that the asset entitling the taxpayer to an investment tax credit in Luxembourg be physically used in Luxembourg should be extended to any Member State.

We believe that this decision is fully in line with the previous decisions rendered by the European Court of Justice.

In Jobra Vermögensverwaltungs-GesellschaftmbH case-law (C-330/07) dated 4 December 2008, the factual background was not significantly different. Austria granted an investment incentive in the form of a tax credit to assets acquired and used in Austria. Consequently, the Austrian tax authorities denied the benefit of such incentive to trucks acquired by an Austrian company and leased to a German company which used them all over the EU territory. The requirement to use the asset in Austria to benefit from the incentive was condemned by the European Court of Justice on the basis of the freedom to provide services.

Another decision (Laboratoires Fournier, C-39/04) dated 10 march 2005, was also rendered by the European Court of Justice in a quite a similar context. According to this decision, granting a tax credit for research activities carried out only in France is contrary to the freedom to provide services.

The Tankreederei decision opens new opportunities for Luxembourg

According to this decision, the investment tax credit should be granted to the Luxembourg taxpayer in case the income derived from the eligible assets used outside Luxembourg is exclusively taxable in Luxembourg (e.g. it is not attributed to a EU tax-exempt Permanent Establishment (“PE”) of the Luxembourg taxpayer). The current Luxembourg tax law (article 152bis LITL) is thus contrary to the freedom to provide services (article 56 TFEU).

The Court did not analyse however the situation where the income derived from the eligible assets used outside Luxembourg is not taxable in Luxembourg (e.g. it is attributed to a EU tax-exempt PE of the Luxembourg taxpayer). The allocation of tax powers between Member States (MS) may possibly justify the difference of treatment, as profits derived from the investment would be taxable in the MS of the PE, while the tax credit for investment is asked for in Luxembourg (i.e. MS of Luxembourg Head Office).

The reaction from the Luxembourg tax authorities will have to be carefully observed.

It is likely that such decision gives Luxembourg a competitive advantage for asset finance deals in the EU. It should indeed be interesting to finance aircrafts, ships,… for instance used within the EU from Luxembourg in order to benefit from this investment tax credit. Moreover, the attractiveness of Luxembourg has been enhanced by new tax measures entered into force as from 1 January 2011 as the investment tax credit rate has increased. Without entering into the details of the computation, almost 16% of the acquisition cost of an eligible asset could be used as tax credit in Luxembourg and could even be carried forward for 10 years in case it cannot be fully used during the year of acquisition.

As a result, Luxembourg is more than yesterday an interesting location to finance investments throughout the EU.