The Article 166 LIR participation exemption and abuse of law: Engie in the Court of Justice and the Luxembourg administrative courts

The judgments

The question

Luxembourg’s participation exemption in Article 166 of the Income Tax Law (LIR) takes dividends and other income from a qualifying participation out of corporate income tax. Its conditions look mechanical: the right kind of parent, the right kind of subsidiary, a direct holding of at least 10% or an acquisition price of at least €1,200,000, kept for an uninterrupted twelve months. Three questions arise in practice. First, is there more to the exemption than its wording, in particular a condition that the distributed profit must first have been taxed in the subsidiary? Secondly, when may the tax authorities, or the European Commission looking at those authorities, set the exemption aside as abusive under the general anti-abuse rule in § 6 of the Steueranpassungsgesetz (StAnpG)? Thirdly, who actually holds a participation when shares are lent, pledged or otherwise put to work?

The Court of Justice answered the first two questions, from the angle of State aid law, on 5 December 2023 in the Engie State aid appeals (Joined Cases C-451/21 P and C-454/21 P). It annulled the Commission decision that had treated the exemption of income from mandatorily convertible bonds as State aid. The Luxembourg administrative courts answered the third question in a securities lending case decided by the Tribunal administratif on 10 February 2023 and by the Cour administrative on 6 February 2024. A net wealth tax judgment of the Tribunal administratif of 23 May 2025 adds a point on a phrase that Article 166 shares with § 60 of the Bewertungsgesetz (BewG): a non-resident subsidiary “fully subject to a tax corresponding to corporate income tax”. This review takes the judgments in that order and then asks what they mean together for groups that rely on the exemption.

The legal framework

Article 166 LIR: conditions, and what has changed

The Advocate General’s Opinion in Engie (point 10) quotes the first paragraph of Article 166 as it applied to the tax rulings at issue, in the following English translation:

Income from a participation held by: 1. a resident collective undertaking that its fully liable to tax and takes one of the forms listed in the Annex to paragraph 10; 2. a resident capital company that is fully liable to tax and is not listed in the Annex to paragraph 10; [points 3 to 5: Luxembourg permanent establishments] shall be exempt where, on the date on which the income is made available, the recipient holds or undertakes to hold that participation for an uninterrupted period of at least 12 months and, throughout that period, the level of the participation does not fall below 10% or the acquisition price below EUR 1200000.

Our current Article 166(1) (consolidation of 1 January 2026) has the same five categories of parent and the same holding conditions. It also contains a second subparagraph which the quoted extract does not show: where income is exempt solely because the acquisition price is at least €1,200,000, the taxpayer may waive the exemption, separately for each tax year and each participation. Article 166(2) limits the exemption to participations held directly in the share capital of three kinds of subsidiary: an entity covered by Article 2 of the Parent-Subsidiary Directive 2011/96/EU, a fully taxable resident capital company, or “a non-resident capital company fully subject to a tax corresponding to corporate income tax”. Paragraph 3 treats a holding through a transparent entity referred to in Article 175(1) as a direct holding, and paragraph 8 provides that the exemption is cancelled by a corrective assessment if the twelve-month condition is not met.

The decisive change for the subject of this review is Article 166(2bis). In our current text it excludes from the exemption income covered by the Parent-Subsidiary Directive from a participation in an entity resident in another Member State “in so far as that income is deductible in that Member State”, or where it is allocated under an arrangement which, having been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the Directive, is not genuine. This is the kind of “correspondence clause” whose absence was at the heart of Engie. The Advocate General noted (point 132) that such a clause “has evidently been introduced in Luxembourg for the future, to transpose the parent-subsidiary directive amended in 2014”, and that this “changes only the reference framework for the future”. Two features of the current wording matter. It applies by way of derogation from paragraph 2, point 1 only, and only to a subsidiary resident in another Member State. Our text of paragraph 2bis does not reach a Luxembourg subsidiary such as those in Engie, nor a subsidiary outside the European Union. The same anti-abuse wording appears for outbound dividends in the withholding tax exemption of Article 147, point 2. Our consolidation lists, among the laws amending Article 166, laws of 18 December 2015, 17 December 2021 and 20 December 2024; it does not show which passage each of them introduced.

Article 164 LIR

Article 164 provides that, in determining taxable income, it is irrelevant whether income is distributed (paragraph 1); that distributions of any kind to holders of shares, beneficiary units, dividend-right units or other securities, including variable-income bonds sharing in annual or liquidation profit, are distributions for that purpose (paragraph 2); and that hidden profit distributions are included in taxable income (paragraph 3). The AG’s quotation of Article 164 (point 9) corresponds to our current text. The Commission’s second line of reasoning in Engie read Articles 164 and 166 together, as if the exemption at the parent were available only for profits that Article 164 had kept in the subsidiary’s tax base. Article 164 is analysed in its own right in our review of hidden profit distributions.

Article 22bis LIR: conversion of a loan

The Engie structure relied on Article 22bis at the level of the intermediary. As quoted by the Advocate General (point 8), point 1 of Article 22bis(2) “in force, according to the judgment under appeal, when the tax rulings at issue were adopted” provided that, on the conversion of a loan, the allocation to the creditor of securities representing the debtor’s share capital did not result in the realisation of capital gains unless the creditor waived that treatment; on conversion of a convertible capital loan, the capitalised interest of the business year preceding conversion was taxable. In our current Article 22bis(2), point 1 is marked “deleted”, and the opening words now refer only to the exchanges in points 2 to 4. The tax-neutral conversion of a loan into shares on which the rulings relied is therefore no longer in the text.

§ 6 and § 11 StAnpG

The Steueranpassungsgesetz of 16 October 1934 is part of Luxembourg tax law (Engie, para. 31); its § 11 is applied in the securities lending judgments, and its § 6 was invoked by the tax office in no. 43749C. The Court of Justice calls its anti-abuse rule “Article 6 of the Law on tax adjustment” (para. 31). The Advocate General gives this English version (point 11):

Tax obligations cannot be circumvented or restricted by abuse of the forms and structural possibilities afforded by civil law. In the event of abuse, taxes shall be levied in the same way as they would be within a legal structure appropriate to the economic transactions, facts and circumstances concerned.

According to the Commission decision, as summarised by the Court (para. 39), the Luxembourg courts apply four criteria to find abuse: the use of forms or institutions of private law, a reduction of the tax burden, the use of inappropriate legal means, and the absence of non-tax reasons. § 11 StAnpG governs the attribution of assets for tax purposes. Its point 4, quoted in the securities lending judgments, attributes an asset to the Eigenbesitzer, the person who possesses the asset as belonging to him. Both provisions are outside our translations and are cited in plain text.

§ 60 BewG: the net wealth tax counterpart

§ 60 BewG exempts from net wealth tax a participation of at least 10% or with an acquisition price of at least €1,200,000 held at the end of the financial year preceding the reference date, if it is held directly in the capital of an entity covered by the Parent-Subsidiary Directive, a fully taxable resident capital company, or “a non-resident capital company fully subject to a tax corresponding to corporate income tax” (§ 60(1) and (2) BewG as quoted by the Tribunal administratif in both 2023 and 2025). According to the 2023 judgment (p. 27, footnote 8), the reference to Directive 2011/96/EU applies from 1 January 2016; at 1 January 2015 the text referred to Directive 90/435/EEC, which it replaced. The Cour administrative calls it part of the “parent-subsidiary” regime and reads its holding condition in the same way as that of Article 166.

Engie: Court of Justice, 5 December 2023

The companies and the ZORA structure

The Engie group consists of Engie SA, established in France, and the companies it controls; it resulted from the merger of the French groups Suez and Gaz de France (para. 3). In Luxembourg it owned Compagnie européenne de financement C.E.F. SA (CEF), incorporated in 1933 and renamed Engie Invest International in 2015. CEF held, among others, GDF Suez Treasury Management Sàrl (GSTM), Electrabel Invest Luxembourg SA (EIL) and GDF Suez LNG Holding Sàrl (LNG Holding), incorporated in 2009 (para. 4). In 2009 the group set up GDF Suez LNG Luxembourg Sàrl (LNG Luxembourg) and GDF Suez LNG Supply SA (LNG Supply), which LNG Holding controlled from the end of 2009 (para. 5).

Two sets of tax rulings concerned transactions of the same design (paras 6–9). A group company transferred its business to a subsidiary. The subsidiary financed the purchase by issuing to an intermediary a fifteen-year, zero-interest bond mandatorily convertible into shares, the ZORA (zéro-intérêts obligation remboursable en actions). On conversion the subsidiary had to issue shares for the nominal amount plus a premium equal to all the profit it had made during the term, less the tax agreed with the Luxembourg authorities: the “ZORA accretions”. The intermediary financed the bond through a prepaid forward sale contract with the holding company that owned both the subsidiary and the intermediary: the holding company paid the nominal amount up front and received the rights to the shares to be issued on conversion, including those representing the accretions.

The first set of five rulings, adopted between 9 September 2008 and 13 March 2014, covered the transfer of LNG Trading’s liquefied natural gas business to LNG Supply (paras 10–12). The transfer contract was signed on 30 October 2009 for USD 657 million (approximately €444 million). On the same day LNG Supply issued a ZORA of USD 646 million to LNG Luxembourg, due on 30 October 2024 but partially converted in 2014, and LNG Luxembourg entered into the prepaid forward contract with LNG Holding. (The Advocate General, at points 20 and 23, describes the transferor as LNG Holding, “which was still LNG Trading at that time”, and converts the price differently; we follow the judgment.)

The tax treatment under the rulings had three layers (paras 13–15). LNG Supply was taxed on a margin agreed with the authorities, a fraction of the gross assets on its balance sheet; the difference between actual profit and that margin was the year’s ZORA accretion, deducted as an expense. LNG Luxembourg could keep the ZORA at nominal value and, on conversion, apply Article 22bis so that the capital gain corresponding to the accretions was not taxed. LNG Holding recorded the forward contract as a financial fixed asset at cost, recognised no income until conversion and, “provided that the conditions laid down in Article 166 of the LIR are met”, received all income from its participations, including the LNG Supply shares obtained on conversion, exempt. In 2014 LNG Supply reduced the ZORA by USD 193.8 million (approximately €163.3 million) for the partial conversion, and LNG Holding’s capital gain of USD 506.2 million (approximately €425.2 million) was exempt under Article 166 (para. 16).

The second set of two rulings, of 9 February 2010 and 15 June 2012, covered the transfer of CEF’s treasury management and financing business to GSTM for €1,036,912,506.84, financed by ZORAs issued to EIL on 17 June 2011 and 30 June 2014, maturing on 17 June 2026, with CEF as the holding company under the forward contract (paras 17–21). The agreed margin was not altered, although the group asked for it to be (para. 20). The Advocate General adds (point 28) that this ZORA had not yet been converted.

The Advocate General summed up the effect (points 40–42): the operating subsidiaries were taxed at the normal rate only on the agreed margin, even in loss years; the remaining profit went into the ZORA; the forward contract left no profit at the intermediary; and the parent received the converted shares as exempt participation income under Article 166.

The Commission decision

After a request for information of 23 March 2015, a letter of 1 April 2016 and the opening of the formal investigation on 19 September 2016, the Commission adopted Decision (EU) 2019/421 on 20 June 2018 (paras 22–25). It did not question the lawfulness of the structure under Luxembourg law, but objected that almost all the profit of the Luxembourg subsidiaries was not actually taxed, “in particular as a result of the exemption provided for in Article 166 of the LIR” (para. 26). It found a selective advantage on four lines of reasoning (para. 31):

• a derogation, at the level of the holding companies, from a reference framework consisting of the Luxembourg corporate income tax system, which taxes companies on their accounting profit (paras 32–33);
• a derogation from a narrower framework consisting of Articles 164 and 166, on the view that the exemption is available only if the distributed profit has been taxed in the subsidiary, and that the accretions were, economically, profit distributions (paras 34–36);
• an advantage to the group as a whole, whose combined Luxembourg tax base was reduced (paras 37–38);
• in the alternative, the non-application of § 6 StAnpG, on the ground that all four criteria of abuse were met: the near-total non-taxation would not have been possible with an equity instrument or a loan between subsidiary and holding company, and there was no genuine economic reason for the complex structure apart from tax savings (paras 39–40).

Luxembourg was ordered to recover the aid materialised by the 2014 partial conversion from LNG Holding or, failing that, from Engie SA or group companies, and to stop applying the rulings to the exemption of income on full conversion of the ZORAs (para. 43).

The General Court

Luxembourg (T-516/18) and Engie Global LNG Holding, Engie Invest International and Engie SA (T-525/18) brought actions on 30 August and 4 September 2018; Ireland intervened in support of Luxembourg (paras 45–47). On 12 May 2021 the General Court dismissed both actions in full (para. 52). According to the Advocate General (point 174), it examined only the second and fourth lines of reasoning. It accepted that Article 166 did not make the exemption “formally dependent” on prior taxation in the subsidiary and that the ZORA accretions were not “formally speaking” profit distributions, but held that the exemption could be contemplated only for profit taxed beforehand, failing which there would be double non-taxation in a purely internal situation, and that “in the very specific circumstances of the present case” the accretions corresponded in practical terms to profit distributions (paras 60 and 123, referring to paras 292 to 300 of the General Court’s judgment). It relied on a letter from Luxembourg of 31 January 2018 and on the opinion of the Conseil d’État on the bill that became Article 166 (para. 125), dated 2 April 1965 by the Advocate General (point 121). On § 6 StAnpG it held that the Commission was not required to examine Luxembourg administrative practice, because the provision “raised no difficulties of interpretation”, and that the criteria of abuse were met (paras 67 and 156; para. 409 of its judgment).

The appeals and the Advocate General

Luxembourg relied on four grounds and Engie on three (paras 81–82). The first ground of both appeals challenged the reference framework of Articles 164 and 166; the second challenged the use of § 6 StAnpG. The Commission argued that both were inadmissible, as new or as challenges to findings of fact on national law (para. 75). The Court disagreed: whether the General Court correctly defined the reference framework and interpreted its provisions is a question of law reviewable on appeal, because it derives from a legal classification of national law under Article 107(1) TFEU (paras 77–80).

Advocate General Kokott proposed that both judgments be set aside and the decision annulled. On Articles 164 and 166, she proposed a restricted standard of review for individual tax assessments and rulings: only a manifest error in the taxpayer’s favour, one that “cannot be plausibly explained to a third party”, would be a selective advantage (points 92 and 101). She then found no such error, and indeed no principle of correspondence at all. The wording contains no link between the two articles, which relate to different taxpayers (point 109). Article 166(1) refers only to a minimum holding period and amount, and Article 164 concerns the basis of assessment of the subsidiary, not whether income is taxed (point 116). The Parent-Subsidiary Directive, which Article 166 transposes for both cross-border and internal situations, had no correspondence clause until its amendment in 2014 (points 106, 110 and 117). Group relief also serves to preserve an exemption at the subsidiary’s level when profits move up the chain (point 118), and the principle of individual taxation means that one taxpayer’s tax does not normally depend on another’s (point 119). In her view the Commission and the General Court had in any event chosen the wrong framework: the near-absence of tax at the subsidiaries was caused by the agreed margin taxation, which the Commission never examined (points 84–85, 123–124). On § 6 StAnpG, she considered that general anti-abuse rules necessarily leave leeway, that the review must be a plausibility check (points 146 and 150), and that an advantage can exist only if the authorities would have applied the rule to comparable cases (points 160–161).

The Court’s reasoning on Articles 164 and 166

The Court started from the settled three-step test for selectivity (para. 107) and stressed that an error in identifying the reference system vitiates the whole analysis (para. 110). Outside harmonised areas, it is the Member State that defines the characteristics of a tax, including “the basis of assessment, the taxable event and any exemptions” (para. 112), and only national law counts in identifying the reference system (para. 113), save for a system designed according to manifestly discriminatory parameters, as in Gibraltar (para. 114). Combined with the principle of legality of taxation (para. 119), this led to the central holding:

It follows that, when determining the reference framework for the purpose of applying Article 107(1) TFEU to tax measures, the Commission is in principle required to accept the interpretation of the relevant provisions of national law given by the Member State concerned in the exchange of arguments referred to in paragraph 111 of this judgment, provided that that interpretation is compatible with the wording of those provisions. The Commission may depart from that interpretation only if it is able to establish, on the basis of reliable and consistent evidence that has been the subject of that exchange of arguments, that another interpretation prevails in the case-law or the administrative practice of that Member State.

The Member State, in turn, must in good faith provide the Commission with all relevant information on the interpretation of national law (para. 122).

Applying this, the Court noted that the General Court had itself departed from a literal reading of Articles 164 and 166 (paras 123–124). The two pieces of evidence it relied on did not show that a different interpretation prevailed in Luxembourg law (para. 128). The General Court had distorted the letter of 31 January 2018 by taking one sentence out of context: elsewhere Luxembourg had written that Article 166 “does not require income from participations to be taxed beforehand in order to benefit from the exemption scheme provided for”, that Articles 164 and 166 were not to be applied “jointly”, and that Article 164 was not a condition sine qua non of the exemption (para. 129). The 1965 opinion of the Conseil d’État said only that the provision aimed to avoid multiple taxation of company profit before distribution to shareholders, not that it was meant to rule out double non-taxation (para. 130, following point 121 of the Opinion). The finding of a “link of conditionality” between the two articles was therefore vitiated by an error of law and a distortion of the facts, and the first ground succeeded (paras 131–132).

The Court did not take up the Advocate General’s “manifest error” standard. It decided the ground on a narrower basis: the evidence about Luxembourg’s own reading of its law.

The Court’s reasoning on § 6 StAnpG

Classifying a measure as selective requires examination of the scope of the relevant law “on the basis, inter alia, of the administrative and judicial practice of the Member State concerned” (para. 152). A horizontal anti-abuse provision such as § 6 StAnpG is inherently general and can be applied in a very wide range of situations (para. 153), and the choice to adopt it and to decide how the authorities implement it falls within the Member States’ fiscal autonomy (para. 154). Hence:

In view of the nature of an anti-abuse provision such as that referred to in paragraph 153 of this judgment, the Commission could not conclude that the non-application of that provision by the tax authorities in order to refuse the tax treatment sought by a taxpayer in a tax ruling request led to the grant of a selective advantage unless that non-application departs from the national case-law or administrative practice relating to that provision. If that were not the case, the Commission would itself be able to define what does or does not constitute a correct application of such a provision, which would exceed the limits of the powers conferred on it by the Treaties in the field of State aid review and would be incompatible with the fiscal autonomy of the Member States referred to in the preceding paragraph.

The General Court had therefore erred in holding that administrative practice need not be considered because § 6 StAnpG raised no difficulties of interpretation (para. 156). The Commission’s references to a Luxembourg circular and to case law (recitals 293 to 298 of the decision) were only a general examination of the conditions of § 6, without showing that the authorities had departed from “their own practice concerning transactions comparable to those at issue” (paras 157–158, following points 153–154 of the Opinion). The second ground succeeded too (para. 159).

The Court did not need to decide the parties’ further arguments on § 6, for instance Luxembourg’s contention that a direct ZORA without an intermediary would have produced the same result through Articles 22bis and 166 (para. 134), or its statement about whether Luxembourg case law allows a transaction approved by a validly issued tax ruling to be found abusive after the event. The English text of paragraph 139 records that statement as “does allow”, which sits uneasily with the thrust of Luxembourg’s argument; the Court did not rule on it.

Final judgment on the actions

Since the state of the proceedings permitted, the Court gave final judgment (paras 161–162). The second line of reasoning fell for the reasons already given; in addition, the Commission had not shown that the concept of “distributions” in Article 164, by which Luxembourg defined “income from participations” in Article 166, was incompatible with a tax-deductible expense at the subsidiary (paras 164–171). The Court added a reservation:

That being so, such a conclusion is without prejudice to an examination of the potentially selective nature of the tax rulings at issue in the light of the finding that the income of LNG Supply and of GSTM in each financial year concerned was, in return for the deduction of the ZORA accretions as expenses, taxed on the margin agreed with the Luxembourg tax authorities and not under the rules of ordinary tax law […].

The fourth line fell with the second ground of appeal (para. 173). On the first and third lines, the Court noted that the Commission had not treated Article 166 itself as an aid scheme (para. 175). The reference system must include the exemptions which the national authorities considered applicable, where those provisions do not in themselves confer a selective advantage; the Commission cannot establish a derogation merely from a general objective of taxing all resident companies “without taking account of provisions of national law specifying the manner in which that objective is to be implemented” (para. 177). By leaving Article 166, “which constitutes the legal basis of the tax rulings at issue”, out of the broad framework, the Commission vitiated its whole analysis (paras 178–181), and the group-level reasoning suffered from the same errors (paras 182–185).

Outcome and costs

The Court set aside the General Court’s judgment of 12 May 2021 and annulled Decision (EU) 2019/421 (operative part, points 2 and 3; para. 186). The Commission was ordered to bear its own costs and pay those of Luxembourg and of Engie and Others in both appeals, and all the costs at first instance (paras 189–191). The operative part does not address Ireland’s costs; the Advocate General had proposed that Ireland bear its own (point 193). Throughout, the Court relies on its judgment in Fiat Chrysler Finance Europe v Commission (C-885/19 P and C-898/19 P, 8 November 2022), cited for instance at paras 77–78 and 104–113; that line is discussed in our review of transfer pricing and State aid.

Who holds the participation: securities lending

Facts and the administrative stage

Company (A), a société anonyme with the status of an alternative investment fund under the Law of 12 July 2013 and later converted into a société en commandite par actions, lent shares in listed companies to two banks, referred to as (B) and (D). According to its own account before the Tribunal administratif, the shares were in companies among the 40 French companies with the largest trading volumes, listed in Paris (Tribunal administratif, p. 19). The lending with (B) was under a “contrat de prêt de titres nantis” of 8 May 2012, under which (B) was both borrower and pledgee with a right to use the pledged securities; the lending with (D) was under a master agreement of 4 May 2007 on financial instruments, referring to the general terms of the European Banking Federation (FBE) and its securities lending annex, amended among others on 8 May 2015 (Cour administrative, pp. 9–10).

On 31 January 2014, according to the director’s decision (29 January 2014 according to the Cour administrative, p. 34), (A) asked for an advance ruling confirming the parent-subsidiary regime for its securities lending. The tax office replied, on the advice of the advance ruling commission, that the treatment was “contrary to the legal and regulatory texts currently in force”; the Cour administrative dates that unfavourable reply 2 March 2015 (pp. 4–5 and 34). In its net wealth tax returns for 2015 and 2016, filed on 15 July 2015 and 17 October 2016, (A) nevertheless declared the lent securities and claimed the § 60 BewG exemption (p. 2).

After letters under § 205(3) AO of 12 November 2019, the tax office issued assessments on 11 March 2020. It refused Article 166 because “the condition of full ownership for an uninterrupted period of at least 12 months is not met” and because, according to the advance ruling commission, the regime of Article 166 “in combination with paragraph 11(2) StAnpG, is not applicable to lent securities”; it refused § 60 BewG because (A) had not been the economic owner of the lent securities at 31 December 2014 and 31 December 2015 (p. 2, our translation). On 4 November 2020 the director held the complaint against the nil municipal business tax assessment for 2015 inadmissible for lack of interest, rejected the complaints on net wealth tax and unit value, and reformed the 2015 corporate income tax assessment in pejus (pp. 1–3). His reasons were that the loans were loans for consumption under Articles 1892 and 1893 of the Civil Code, because they were remunerated and a loan for use is “essentially gratuitous” under Article 1876; that the contracts transferred full ownership to the banks; that the lent securities had to be replaced in (A)’s balance sheet by claims; and that the remuneration of the loans, “in the form in particular of interest, commissions or retrocession of dividends”, was fully taxable (pp. 6–11). The in pejus element came from the minimum tax: once the lent shares were treated as claims rather than transferable securities, the qualifying financial assets no longer exceeded 90% of the balance sheet, so the director applied the balance-sheet-based minimum tax of Article 174(6), point 2, in its 2015 version instead of the €3,000 minimum of point 1 (pp. 11–13); the Cour administrative later confirmed that the change to the 2015 corporate income tax came from that recalculation, based on data supplied by (A) (p. 20). Our current translation shows paragraph 6 of Article 174 only as “(…)”.

Tribunal administratif, 10 February 2023, no. 45567

The Tribunal administratif (first-instance administrative court) admitted the action for reformation against the director’s decision of 4 November 2020 despite the “somewhat unfortunate” wording of the petition (pp. 15–17). It rejected the claim that (A) had not been heard under § 205(3) AO: the letters of 12 November 2019 and the proposed assessments annexed to them had announced both refusals (pp. 23–24). It upheld the inadmissibility of the complaint against the nil municipal business tax assessment: the 17-year limit on loss carry-forwards in Article 114(2) did not apply to 2015 losses, which Article 114 allows to be carried forward without limit under paragraph 3, and a nil assessment does not fix a loss definitively (pp. 24–26).

On the merits, the Tribunal read “holding” in § 60 BewG through § 11 StAnpG, citing by analogy the Cour administrative’s judgment of 26 June 2008, no. 24061C. Eigenbesitzer is a sui generis tax concept that envisages a possessor rather than a legal owner; it means in principle the legal owner, unless economic reality shows that economic ownership has passed to a third party (pp. 27–28). The burden of proof was on (A) under Article 59 of the Law of 21 June 1999 (p. 28). The loans were remunerated and therefore not loans for use (p. 28). The indicators (A) relied on (chances of gain, risk of loss, control through recall on demand, accounting) were “certainly indications”, but the contracts showed “unequivocally” that economic ownership had passed to the borrowers (p. 29). The FBE terms provided for a transfer in full ownership in which the transferor could not reserve any right of ownership or disposal; the (B) contract transferred ownership on delivery and provided for restitution “in full ownership”; and under both contracts the distributions on the lent shares went first to the banks, which paid (A) a percentage of the dividend (85% to 94.75% under the (B) execution notices, 85% of the gross dividend under a (D) confirmation) plus a fee (pp. 29–30).

Article 40 LIR, which links the tax balance sheet to the commercial balance sheet, did not help (A). It applies to income tax, and no net wealth tax provision makes it applicable there (citing Tribunal administratif, 13 December 2018, no. 40704); in any case it yields where tax principles differ, as § 11(4) StAnpG did here (pp. 31–32). Lux GAAP does not settle the accounting for securities lending, and Belgian, French and German sources all treat the loan as transferring the securities to the borrower’s balance sheet (p. 31). The claim that a claim for return should be valued at acquisition cost was rejected as unsupported (p. 32).

On corporate income tax, the Tribunal paraphrased Article 166 and added that, absent a definition of “holding” in Article 166, § 11 StAnpG applies (citing Cour administrative, 16 June 2009, no. 25443C). Since (A) was not the Eigenbesitzer, it could not have held the participation for an uninterrupted twelve months during the loans; and since distributions went first to the borrowers, (A) did not benefit directly from income of the participation (pp. 32–33). The argument that unlent shares kept in deposit for more than twelve months made the dividends on the lent shares replacement income under Articles 11(1) and 97(1) LIR failed for lack of developed reasoning, as did an undeveloped argument based on Article 8(5) of the France–Luxembourg tax treaty of 20 March 2018 (p. 33). The challenge to the director’s refusal to suspend enforcement had become moot because the tax had been paid (p. 34). The action was dismissed, the procedural indemnity of €5,000 refused and (A) ordered to pay the costs (pp. 34–35).

Cour administrative, 6 February 2024, no. 48715C

The Cour administrative (administrative court of appeal) limited the appeal to the director’s decision of 4 November 2020 (pp. 14–15) and refused to order the State to file a further brief, since a rejoinder is optional (p. 15).

Procedural grounds. The Court accepted, as a new ground admissible on appeal, that the director himself must respect § 205(3) AO, because § 244 AO gives the director the powers of the tax office and the right to be heard is fundamental (pp. 17–18). It found no breach. The obligation covers only substantial changes to the taxpayer’s detriment arising from divergences on facts, not pure questions of interpretation of the law, and in principle it does not arise for points already raised in the complaint (p. 19). The director had replaced the lent securities with claims but valued them at the tax office’s figures, and the change in the 2015 corporate income tax came from data supplied by (A) itself (pp. 19–20). The director’s decision was adequately reasoned for the purposes of the burden of proof (p. 20). Its reliance on Articles 40 and 166 LIR, § 11 StAnpG and § 60 BewG meant it did not lack a legal basis (p. 21). Legitimate expectations failed because (A) had received no confirmation from a competent authority (pp. 21–22), and equality before tax failed because the administration need not publish a circular on securities lending and (A) showed no different treatment of others (p. 22).

What “holding” means. The Court treated the condition of holding as common to § 60 BewG and Article 166. It recalled its judgments of 31 March 2022, nos. 45526C and 46289C, under which the holding requirement of Article 166 is interpreted in the same way in intra-EU, purely internal and third-country situations, consistently with the Parent-Subsidiary Directive (p. 29). It then restated their test:

Article 166 LIR must be interpreted as meaning that a participation is in principle to be regarded as held by the recipient of the participation income where the latter is the legal owner of the participation. The holder of the participation is the person who is placed in a direct legal relationship with the subsidiary – subject to paragraph (3) of Article 166 LIR – which confers on it the rights inherent in the capacity of member or shareholder of that company. A legal relationship between the recipient of the income and a third legal person concerning some of those rights has no effect on the recognition of the holding by the recipient, as long as that relationship does not transfer to the third person the exercise of the essential rights and risks inherent in the capacity of member or shareholder in relation to the subsidiary.

Only in that last case may the third party claim to be the holder, as economic owner, in place of the legal owner (p. 29).

Legal ownership. Older Luxembourg writing partly saw securities lending as a loan for use; more recent writing follows the French and Belgian classification as a loan for consumption (p. 30). The contracts provided for return of securities “of the same nature”, which points to fungible goods; they were remunerated; and (A) itself had described both as transferring legal ownership. They were loans for consumption that transferred legal ownership to the borrowers for the duration of the loans (pp. 30–31).

Economic ownership. Foreign doctrine and case law do not bind the Luxembourg judge but can shed light on economic ownership, a concept rooted in the German wirtschaftliche Betrachtungsweise (p. 31). The Court used the German Finance Ministry circular of 11 November 2016 (updated 9 July 2021): in principle the borrower is the economic owner, exceptionally the lender, where the transfer spans the dividend date for a short period or where the borrower’s position is purely formal, judged by indicators such as a tax-driven fee, no cash advantage to the borrower, excluded voting rights and a weak legal position (pp. 31–32). It also used two judgments of the Bundesfinanzhof: one of 29 September 2021, which attributed economic ownership to borrowers who could profit from or suffer price movements despite manufactured dividends and a three-day recall right, and one of 2 February 2022, which refused it where the borrower was only “an empty shell of ownership” used for a tax advantage (p. 32).

On the facts, everything pointed to the banks (pp. 33–34). Termination rights were not reserved to (A), and under the (B) contract (A) had to compensate the borrower for the costs of an early recall. (A) itself said the loans were not tax-driven but meant to earn extra income. An “arbitrage agreement” referred to in (A)’s 2014 accounts showed (D)’s aim of profiting from price movements. The loans ran for long periods: from 18 April 2013 to 17 April 2015, from 29 April 2014 to 4 May 2015, and a programme from 8 May 2015 to 30 June 2017. The 2014 ruling request described a fixed two-year loan. Nothing restricted the borrowers’ voting rights. (B) itself drew the lender’s attention to certain clauses, which showed an active role in setting the terms; it was no “empty shell of ownership”. And an email exchange of 28 and 30 August 2019 showed that (A) followed its fees but not the number of shares on loan, which did not suggest attention to its voting rights. (A) had therefore not remained economic owner, and it could claim neither the net wealth tax exemption for the lent shares nor the corporate income tax exemption for the dividends or substitute income on them (p. 34). The replacement-income argument based on unlent shares failed, as at first instance (pp. 34–35).

Claims for return. Since (A) was neither legal nor economic owner, the director was right to require claims for the return of securities (créances-titres) in its tax balance sheet (pp. 35–36). The Luxembourg accounting standards body appeared not to have addressed the question, but the Belgian accounting standards body’s opinion 169/1 of 1 February 1995, the German circular and French doctrine all converged on that solution (pp. 35–36).

Valuation. For net wealth tax, the claims were not securities, shares or capital claims payable in money under the specific BewG rules, so § 10 BewG applied: the gemeiner Wert, the price obtainable in the ordinary course of business (pp. 36–37). A buyer of such a claim would look at the market value of the lent shares, so their stock exchange price at 31 December 2014 and 31 December 2015 was a floor value; the claim that the claims should be valued at nominal value was rejected (pp. 37–38). However, the administration had shown that it used the stock exchange price for only one participation at 1 January 2015, and had otherwise failed to carry its burden of proof (p. 38).

Outcome. The appeal was partly upheld. The director’s decision was annulled only in so far as it fully confirmed the unit value assessments at 1 January 2015 and 1 January 2016, and the case was referred back to the director to ensure that the unit values were fixed in line with the judgment; the first-instance judgment was otherwise confirmed (pp. 38–40). The claim for repayment of late-payment interest was premature, no procedural indemnity was awarded, and the costs of both instances were pooled and borne three quarters by (A) and one quarter by the State (pp. 39–40).

A subsidiary “fully subject to a tax corresponding to corporate income tax”: Tribunal administratif, 23 May 2025, no. 49212

Facts and procedure

Company (AA), a Luxembourg SARL incorporated on 20 November 2013 for holding and intra-group financing, acquired in December 2015 all the shares in (BB), a US company and parent of a consolidated US group (p. 3). For net wealth tax at 1 January 2018, the tax office announced by letter of 1 June 2022 under § 205(3) AO that it would apply an exchange rate of USD 1 = €0.8852 under a circular of 24 January 2018 and that the participation in (BB) did not meet § 60(2) no. 3 BewG; (AA) did not reply by the deadline of 22 June 2022 (pp. 1–2). The assessments of 20 July 2022 refused the exemption; the complaint of 21 October 2022 went unanswered, and (AA) brought the case directly before the Tribunal administratif on 26 July 2023, as the Law of 7 November 1996 allows after six months without a decision (pp. 1–2). The Tribunal admitted the action against both the unit value assessment and the net wealth tax assessment, since it could adjust the latter under § 218(4) AO (pp. 2–3).

The arguments

(AA) relied on parliamentary works on Article 164bis LIR, which describe a tax corresponding to Luxembourg corporate income tax as a compulsory tax levied by a public authority at an effective rate of at least half the Luxembourg rate, with a base determined under analogous rules (p. 4). (BB) was subject to federal corporate income tax at 21% and, after credits, at an effective 15.48%, above half of the 18% Luxembourg rate for 2018 (pp. 4–5). The State itself put the minimum effective rate for 2018 at 9%, half of 18% (p. 5). It questioned the evidence, however. The 2021 documents concerned the wrong year; the residence certificate did not state the tax regime and came from an office in another state; the return gave a group address elsewhere and named another company as parent; only a 2018 assessment with proof of payment would do. It also described (BB)’s state of incorporation as “a jurisdiction with a privileged tax regime” (pp. 5–7). (AA) answered that the IRS issues no assessments under a self-assessment system and that residence certificates come from a single IRS office, and filed further extracts of the return, a signature page showing the tax due, and payment records (pp. 7–9).

The decision

The Tribunal held that a non-resident capital company is “fully subject” to such a tax if it enjoys no total or partial subjective exemption, that is, an exemption granted by an express provision (p. 11). The burden was on (AA) under Article 59 of the Law of 21 June 1999, but proof in tax matters is free. A 2018 residence certificate confirming a US federal return, the return showing taxable income and tax after credits at an effective 15.48%, which the State did not dispute qualified, and uncontested payment records were sufficient. The State’s demand for an IRS assessment was rejected, as were its doubts about addresses and parent names, which (AA) had explained without contradiction (pp. 11–12). The State’s undeveloped objection on the exchange rate was also rejected (p. 13). The unit value assessment was reformed to exempt the participation, with automatic adjustment of the net wealth tax assessment, and the case was sent back to the tax office (pp. 13 and 15). The State bore the costs, but the procedural indemnity (€3,000, raised to €5,000 in the reply) was refused: by ignoring the § 205(3) letter and producing the necessary documents only gradually, (AA) had through its own negligence caused the litigation (pp. 13–15).

Relevance to Article 166

The judgment concerns § 60(2) no. 3 BewG, not Article 166. But Article 166(2), point 3 uses the same words for a non-resident subsidiary, and (AA) pointed out that the parliamentary works on § 60 BewG and on Article 166 do not define the phrase, before turning to those on Article 164bis (p. 4). The Tribunal did not itself fix the 9% threshold, which it took as uncontested; what it decided was the meaning of “fully subject” and the standard of proof. No appeal judgment is among our sources.

A note on Cour administrative, 28 May 2020, no. 43749C

Of the Luxembourg decisions examined for this review, this is the only one in which the tax authorities invoked § 6 StAnpG, but it does not decide on it. The tax office had treated a series of steps as abusive under § 6: the acquisition on 12 August 2016 of a reinsurance company by a holding company with no participations at the end of 2015, the conversion of the reinsurer from SA to SARL, and a simplified merger with retroactive accounting and tax effect from 1 January 2016. The purpose, in the director’s analysis, was to move the release of an equalisation provision into a company with large tax losses (pp. 2–7). The director applied three criteria, citing the Cour administrative’s judgment of 7 February 2013, no. 31320C (p. 5). The Cour administrative instead refused tax effect to the retroactivity because it did not reflect the economic reality of the transaction (pp. 12–13), and held it “superfluous” to examine abuse under § 6 StAnpG (p. 14). It referred the case back for the absorbed company to be taxed individually on all its 2016 operations, including its claimed losses, and pooled the costs equally (pp. 16–18). The appellant argued that, under the Court’s case law, elements confirmed in an advance ruling could not later be called inadequate means (p. 16), but the Court did not rule on that point. We therefore do not list the judgment as a ruling on § 6 StAnpG.

How the judgments fit together

Article 166 means what it says, at least for the Commission. Engie is a State aid judgment. It does not interpret Article 166 for the Luxembourg courts. What it decides is that the Commission had not shown, with reliable and consistent evidence, that Luxembourg case law or practice read a condition of prior taxation into Article 166, so it had to accept Luxembourg’s reading, which matched the wording (paras 120–121, 128–131, 169–171). For taxpayers the practical result is the same: neither the Commission nor the General Court could make the exemption depend on how the subsidiary was taxed. The Advocate General went further and found no principle of correspondence in Luxembourg law at all (points 115–122, 135). The Court did not need to go that far.

The legislature, not the Commission, closes gaps. Both the Court (para. 112) and the Advocate General (points 133–134) put the choice of a correspondence rule with the national legislature. Our current text shows what the legislature did for cross-border cases: Article 166(2bis) denies the exemption for income deductible in the subsidiary’s Member State and for non-genuine arrangements. Its wording does not cover a Luxembourg subsidiary. A purely domestic ZORA-type mismatch like Engie’s therefore remains outside paragraph 2bis on our current text. The conversion relief that the intermediary used under former Article 22bis(2), point 1 has, however, gone from the current text.

Abuse of law is a national practice question. In Engie the Commission had argued that all four Luxembourg criteria of abuse were met. The Court held that this was not enough; it had to show a departure from the practice for comparable transactions (paras 155–158). The Luxembourg judgments reviewed here contain no ruling applying § 6 StAnpG to the participation exemption. The one decision examined in which the tax office invoked § 6, no. 43749C, was decided on economic reality and the timing of a merger instead. In the securities lending case, the tax office’s reference to § 11(2) StAnpG and the courts’ reliance on § 11(4) StAnpG show the more usual route: not abuse, but attribution. Who holds the shares is decided under § 11 on the contracts and how they were performed, and the taxpayer bears the burden of proof.

Substance over form cuts both ways. In Engie the General Court looked past the legal form of the ZORA to its economic effect when reading Articles 164 and 166 (para. 126), without evidence that Luxembourg law itself read them that way (paras 128–131). The Luxembourg courts in the securities lending case did look at economic reality, but under an express statutory rule, § 11 StAnpG, and largely to confirm the legal form: the loans transferred legal ownership, and nothing in the contracts kept the essential rights and risks with the lender.

Open points. Engie left untouched the question of whether the agreed margin taxation of LNG Supply and GSTM was itself a selective advantage (para. 172; Opinion, points 84–85). Nor did the Court decide whether a direct ZORA would have produced the same result (para. 134). The Luxembourg courts did not decide whether a lender who keeps some unlent shares can treat manufactured dividends as income from the participation, because the argument was not developed (Cour administrative, pp. 34–35). The 2025 Tribunal judgment accepted a 9% effective-rate benchmark only because the State did not dispute it.

What it means in practice

• Check the conditions in the text and the year. For Luxembourg parents of Luxembourg subsidiaries, our current Article 166 contains no condition that the subsidiary’s profit be taxed. For EU subsidiaries, paragraph 2bis must be checked for every payment: is the income deductible in the subsidiary’s State, and is the arrangement genuine? Where an older year is in dispute, check whether the wording applied then matches the current text; Article 22bis(2), point 1 is an example of a provision that has since been deleted.
• Keep legal title and the rights that go with it. The Cour administrative’s test asks who is in a direct legal relationship with the subsidiary and whether the essential rights and risks of a shareholder have passed to someone else. In the securities lending case, the contracts with the two banks passed both, so the lender lost the Article 166 exemption on dividends and the § 60 BewG exemption on the shares for the period of the loan, and could not meet the twelve-month holding condition during the loan (Tribunal administratif, p. 33). The manufactured dividends and lending fees were fully taxable.
• Book a claim for return, valued at market. For net wealth tax the lender holds a claim for return of securities, valued under § 10 BewG at the price obtainable in the ordinary course of business, with the year-end stock exchange price as a floor. Under the 2015 rules, that reclassification also changed the minimum corporate income tax test, as the director’s in pejus reform shows.
• An unfavourable ruling is a warning. In the securities lending case the taxpayer had asked for a ruling, received a negative answer and filed on the opposite basis. Its legitimate expectations argument failed because it had no confirmation from a competent authority (Cour administrative, pp. 21–22).
• Document the foreign subsidiary’s tax. For a subsidiary relying on the “tax corresponding to corporate income tax” limb, keep the residence certificate for the right year, the return showing taxable income and tax after credits, and proof of payment. Proof is free, but it has to be produced.
• Answer § 205(3) letters. In the 2025 case the taxpayer won on the merits, yet was refused a procedural indemnity because it ignored the tax office’s letter and produced its documents piecemeal.
• For rulings and State aid. Engie confirms that the Commission must work with the Member State’s own reading of its law, established through the exchange of arguments, and with evidence of national practice where a general anti-abuse rule is involved. Records of comparable rulings and of the authorities’ practice are therefore central evidence in any State aid review of a ruling.

Status

The Court of Justice’s judgment of 5 December 2023 is final: the General Court’s judgment was set aside and Decision (EU) 2019/421 annulled. The Court expressly left open an examination of the agreed margin taxation (para. 172), and the Advocate General noted that the Commission could address it in a new decision, provided the limitation period had not expired (point 85). Our sources show no such decision.

The Cour administrative’s judgment of 6 February 2024 referred the valuation of the claims for return back to the director; the outcome is not in our sources. No appeal judgment against the Tribunal administratif’s judgment of 23 May 2025 is among our sources.

On the legislative side, our current Article 166 contains the anti-hybrid and anti-abuse rule of paragraph 2bis for EU subsidiaries, and our current Article 22bis(2) no longer contains point 1 on the conversion of a loan, which the Engie rulings relied on.

Provisions discussed

• Income Tax Law: Art. 166, Art. 164, Art. 40

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How to cite

Case law review by BCA EU, for information. Quotations from the judgments are our translations; only the original texts published by the courts are authoritative. Judgments checked on the official sources on 30 October 2026. This page is not legal or tax advice.