Comment: Ernst & Young, Luxembourg examines the EC's decision to formally investigate the Grand Duchy's 1929 holding companies law

The European Commission has initiated a formal investigation into Luxembourg's 1929 holding companies regime under the state aid procedures of the EC Treaty.

These holding companies are incorporated under Luxembourg law and elect to be subject to the specific holding company regime based on the law of 31 July 1929. The regime in essence provides for exemptions from corporate income & municipal business tax, withholding tax and net worth tax, but subjects 1929 holding companies to an annual subscription tax at a rate of 0.2% on the value of their shares and to the 1% capital duty.

The 1929 Holding company regime had been short-listed as a 'harmful tax measure' in the framework of the EU Code of Conduct, and a political agreement was reached in 2003 to phase out the then current regime until the end of 2010. In addition, the 1929 Holding company legislation was amended with effect from 1 July 2005 to address the identified harmful features. As a consequence, 1929 holding companies incorporated on or after 1 July 2005 do not benefit from the tax-exempt regime if they receive 5% or more of their dividend income from low-taxed subsidiaries.

Should the Commission's investigations conclude that Luxembourg 1929 holding companies are indeed a form of state aid, there appear to be arguments that the regime might only need to be amended for the future and that 1929 holding companies would not have to repay state aid granted in the past. However, at this stage, very little information is available and, therefore, the potential impact of the state aid investigations on any particular structure should be analysed on a case-by-case basis. Groups and individuals that hold (or plan to incorporate) 1929 holding companies are recommended to seek advice on the potential impact of the investigations on their particular structure.

The opening of the investigations does not concern Luxembourg SOPARFIs, which are ordinary taxable Luxembourg companies that merely benefit from the EU Parent-Subsidiary Directive and its implementation into Luxembourg law.

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