Tax consolidation is allowed for fully taxable resident entities, i.e. vertical groups (the parent entity can be a Luxembourg permanent establishment of a non-resident company) provided that each member is owned for at least 95% directly or indirectly by the parent. The consolidation lasts for a five-year period.
Effective 1 January 2016, ‘horizontal tax consolidation’ is allowed in Luxembourg based on a decision by the Court of Justice of the European Union (CJEU). Under horizontal tax consolidation, if a parent company of a group is based in any European Economic Area (EEA) country, then tax consolidation is allowed with its subsidiary resident in Luxembourg provided that the parent company is subject to a tax comparable to Luxembourg corporate taxes in its country of residence.
Further, a tax consolidation is also possible in case of a Luxembourg permanent establishment of a company established in another jurisdiction which is subject to a tax comparable to Luxembourg corporate taxes. In such a case, the Luxembourg permanent establishment will be considered as an integrated entity.
In compliance with a May 2020 decision (C-749/18) of the Court of Justice of the European Union, effective from tax year 2020 until 2022, vertical groups are allowed to convert into a horizontal group without the tax consequences of dissolving the integrated group, subject to the following conditions:
- The integrating parent of the previous ‘dissolved’ integrated group must become the integrating subsidiary of the new integrated group;
- The change must take place by the tax year 2022;
- The change must widen the scope of the dissolved integrated group; and
- The members of the new integrated group must remain a group company for at least 5 operating years, although for those that were already part of the dissolved integrated group, the determination of the minimum period of 5 years is made as if the change had not taken place.