Tax in Distressed Situations: LUXEMBOURG

DEBT RESTRUCTURINGSGENERAL1. Does debt have a specific meaning for tax purposes?The notion of debt is not specifically defined for Luxembourg tax purposes.Instead, the general principle of substance over form applies to determine the tax classificationof an instrument as debt or equity, requiring an economic and financial analysis of eachtransaction. Based on parliamentary documents and case law, certain features of a loan such as,for instance, the absence of an interest rate and absent or unclear repayment modalities, couldjustify a requalification of the loan as an equity instrument for tax purposes. While the accountingand legal treatment of the instrument is technically not decisive, in practice an instrumentthat legally and accounting wise does not qualify as debt is more likely to also not qualify asdebt from a tax perspective. Because of the considerations above, the tax qualification of debtinstruments is subject to a case-by-case analysis.Unless specified otherwise, the remainder of this commentary assumes that the instrument istreated as debt for Luxembourg tax purposes and does not have particular equity-like features(e.g., profit participation).2. Do derivatives have a specific meaning for tax purposes?The notion of derivative is not specifically defined for tax purposes.In application of the general principle of substance over form, the tax treatment of derivativesshould be determined on a case-by-case basis.3. Generally, are intra-group debts treated differently to external debt for tax purposes?In principle, intra-group debt is treated in the same manner as external debt. However, in anintragroup context, specifically where the debt is contracted between “associated enterprises”,additional tax considerations should be taken into account.The creditor and the debtor will be considered to be “associated enterprises” if one companyparticipates, directly or indirectly, to the management, control or capital of another company, or ifthe same persons participate, directly or indirectly, to the management, control or capital of thesame two companies.In such cases, key tax considerations are the arm’s length character of the debt, as well as, incase of any challenge to the debt qualification of the instrument, the application of withholdingtax or exemptions thereof and interest deductibility rules.4. Does it make a difference if debt is owed by a partnership or other pass-through entity indistress to third parties versus to its partners?The tax consequences applicable in case debt is owed by a partnership are different dependingon whether the partnership is treated as opaque or transparent for tax purposes.In the case of a tax transparent partnership, the debt payable by the partnership (regardless ofwhether the debt is distressed or not) to one of its partners is disregarded with respect to thispartner for tax purposes. The debt payable by the partnership to a third-party is considered (fortax purposes) payable pro-rata by each of the partners of the partnership to the third-party.DEBT IMPAIRMENT1. What are the key tax considerations on a debt impairment for the creditor?For tax purposes, receivables are in principle valued at their cost price, unless their market valueis lower than the cost price, in which case the tax balance sheet can reflect such lower marketvalue and an impairment can be booked.If economically justified, the impairment of a debt receivable is deductible from the corporatetax base of a Luxembourg creditor. However, it is noted that such impairments must be reversedif the reasons having motivated the impairment cease to exist, i.e., if the debtor’s economicsituation subsequently improves. The reversal of such impairments is fully taxable in the handsof the creditor.3TAX IN DISTRESSED SITUATIONS - LUXEMBOURG2. What are the key tax considerations on a debt impairment for the debtor?The impairment of a debt receivable by the creditor should generally not trigger adverse taxconsequences at the level of the debtor.However, the position of the tax position of the debtor could in certain situations be impacted.This would be the case if the impairment is followed by an actual debt waiver to the benefit ofthe Luxembourg debtor (see below under “Does the release of debt trigger taxable income for thedebtor? If so are there any reliefs or exemptions?”). If the terms of the instrument are such thatthe repayment obligation is adjusted on a periodic basis prior to maturity, this could also have animpact on the tax position of the debtor.DEBT AMENDMENT, REFINANCING AND NOVATION1. What are the key tax considerations on a debt amendment?Unless it qualifies as a novation or refinancing, a debt amendment should generally not give riseto adverse tax consequences at the level of a Luxembourg debtor or creditor. Key tax issues tobe considered in the context of a debt amendment are transfer pricing principles (in case of anintercompany debt amendment), as well as more specifically from the perspective of the debtor,any impact on the withholding tax position and tax deductibility of interest payments.2. Does the deferral of any payments of interest or repayments of principal trigger taxconsequences?For Luxembourg corporate tax purposes, interest income and expenses are generally accountedon an accrual (rather than a cash) basis. Therefore, only the deferral of interest accrual canhave a tax impact, notably on the timing of recognition of any interest income and expenses, asopposed to the deferral of actual interest payments.Unless the deferral has the effect of giving rise to accounting adjustments (see above), thedeferral of any repayment of principal should in principle not trigger adverse Luxembourgcorporate income tax consequences for the debtor.The deferral of any repayment of principal should not trigger adverse Luxembourg corporate taxconsequences, unless no interest would be applied during the deferral period (which could beconsidered non-arm’s length).Assuming the debt was not discounted and has not been impaired by the creditor, repayment ofprincipal should not give rise to any adverse Luxembourg corporate income tax consequencesfor a Luxembourg debtor or creditor. Where a debt was issued or acquired at a discount (orimpaired), any repayment of principal which exceeds the tax value thereof, would be taxable inthe hands of the creditor.3. What are the key tax considerations on a debt refinancing?The repayment of the existing debt should neither give rise to withholding tax, nor impactthe deductibility of interest payments. For new debt, the general tax considerations for debtinstruments apply. If a debt refinancing results in a formal or economic waiver of debt, this maygive rise to taxable debt waiver income at the level of the debtor (see below under “Does therelease of debt trigger taxable income for the debtor? If so are there any reliefs or exemptions?”).Furthermore, the refinancing of foreign currency denominated debt may trigger a taxable foreignexchange result. When debt is refinanced in intra-group situations the arm’s length character ofthe debt refinancing (and the terms and conditions of the debt itself) should be analysed.4. Does rolling up interest or satisfying interest through issuing “payment in kind” notes giverise to any tax consequences?For Luxembourg corporate tax purposes, interest income and expenses are accounted generallyon an accrual (rather than a cash) basis. Accordingly, neither the capitalisation, nor issuanceof payment-in-kind (“PIK”) notes should per se have adverse Luxembourg corporate taxconsequences for either a Luxembourg creditor or a Luxembourg debtor.As a principle, no withholding tax is levied on arm’s length interest payments made to corporateLuxembourg resident or non-resident creditors, thus it should be irrelevant for Luxembourg(withholding) tax purposes whether interest is paid in cash, is accrued to the principal amountor is paid in kind. Withholding tax may still be applicable in specific cases, e.g., where the debtinstrument is requalified as an equity instrument, or where the interest payment is made to anindividual beneficial owner resident in Luxembourg.4TAX IN DISTRESSED SITUATIONS - LUXEMBOURG5. Does the novation of debt by a debtor to another group company trigger any adverse taxconsequences?The novation of debt involving a change of the debtor should trigger the realisation of anyunrealised capital gains or losses at the moment of the novation.Assuming that the novation to the new debtor is carried out in compliance with arm’s lengthconditions, it should not trigger adverse Luxembourg tax consequences at the level of the initialLuxembourg debtor. Upon the novation of debt, the original debtor will ordinarily owe the newdebtor an amount equal to the debt assumed by the new debtor. Generally, this will take the formof a new intercompany balance between the two entities. With respect to the new intercompanybalance and the new debtor, the general points to consider in respect of intercompany debt wouldbe equally applicable (e.g., arm’s length conditions, debt/equity treatment, interest deductibility).6. Are there any specific tax considerations to bear in mind where the security / guaranteepackage is amended as part of the debt amendment / refinancing?For a Luxembourg debtor benefitting from a guarantee, no adverse Luxembourg taxconsequences should arise on entry into, or amendments to, a guarantee by a Luxembourgguarantor or on the taking of security over a Luxembourg-based asset.However, where a guarantee is provided by a Luxembourg guarantor in an intra-group context,applying transfer pricing principles, it should be determined whether the Luxembourg guarantorshould be remunerated for having provided that guarantee for the benefit of the borrower. Inparticular, in case the guarantee increases the borrowing capacity of the debtor, it should beanalysed (in light of OECD guidance) whether for transfer pricing purposes a portion of the loan(corresponding to the increased borrowing capacity) should rather be considered as a loanfrom the lender to the guarantor, followed by a capital contribution from the guarantor into theborrowing entity.DEBT RELEASES1. Does the release of debt trigger taxable income for the debtor? If so are there any reliefs orexemptions?At the level of a Luxembourg debtor, the release of debt triggers accounting profit, which as aprinciple is fully taxable to corporate taxes at a combined current rate of approximately 24%.An exemption may apply where the debt release is granted in view of the financial recovery of adebtor that is in a distressed financial situation (“gain d’assainissement”). The application of thisexemption is subject to several conditions, some of which are expressly stated in the law andothers which have been set-out by case law (i.e., the debt release must be (i) definitive in nature,(ii) granted by at least a majority of the creditors, and (iii) granted exclusively in the interest of thefinancial recovery of the debtor). The tax treatment of debt waivers motivated by the shareholderrelationship is subject to different considerations. In such situations, a debt waiver could berequalified, subject to certain conditions, into a “hidden” capital contribution, which is tax neutral.Depending on the value of such “hidden” contribution, the waiver gain could however remainpartially taxable.Where the debtor is within the scope of Pillar 2, it will be important to consider whether therelease gives rise to any Pillar 2 impact (see “Are there any Pillar 2 considerations to take intoaccount specifically in distressed situations?”).2. Does the release of debt trigger any withholding or indirect tax? If so, are there any reliefs orexemptions? The release of debt as such should not trigger withholding tax or indirect Luxembourg taxconsequences.In the case of a release of debt between related parties (e.g., in case of debt release by asubsidiary to its parent or to a sister company), the tax authorities could requalify the debtrelease into a “hidden” dividend distribution, on which a 15% withholding tax is in principle due,unless a domestic or treaty exemption is available.3. Can a creditor claim a deduction in respect of any debt that is released?If the debt release results in an accounting loss for Lux GAAP purposes (typically for the portionof the debt that was not yet impaired), this accounting loss would in principle give rise to a taxdeductible loss for the Luxembourg creditor.5TAX IN DISTRESSED SITUATIONS - LUXEMBOURGIn a related party situation, where the creditor is the shareholder of the debtor, the debt releasecould be requalified into either a non-deductible hidden contribution at the level of the debtor(for a debt release in favour of a direct or indirect subsidiary) or a non-deductible hidden dividenddistribution (in case of debt release by a subsidiary in favour of its parent or to a sister company).4. Is the position different if the debt being released is a trade debt?The waiver of a trade debt is treated in the same manner as any other debt (e.g., a formallydocumented loan). Hence any loss realized on the waiver of a trade debt should generally betax-deductible at the level of the Luxembourg creditor (see above under “Can a creditor claim adeduction in respect of any debt that is released?”).5. Does the release of an uncalled guarantee obligation trigger any adverse tax consequences?Is the position different if the guarantee has been called?Assuming the uncalled guarantee is not recorded as a liability for accounting purposes (but onlyappears in the off-balance sheet commitments of the guarantor), the release of an uncalledguarantee should not have adverse tax consequences.Conversely, where the borrower has defaulted and the guarantee has been called, this wouldgenerally give rise to a liability being recorded for tax purposes. Furthermore, in an intra-groupcontext, not calling a guarantee obligation which can contractually be called could be requalifiedinto either a deemed debt release or a hidden contribution/distribution (depending whetherthe entity benefiting from the guarantee is an (in)direct parent, sister company or an (in)directsubsidiary). The tax implications set out in sections “Does the release of debt trigger taxableincome for the debtor? If so are there any reliefs or exemptions?” and “Can a creditor claim adeduction in respect of any debt that is released?” are relevant in such cases.6. Do any adverse tax consequences arise on the release of liabilities owed under a derivativecontract?Luxembourg tax law does not prescribe for specific rules applying to derivative contracts. Thetax consequences attached to the release of liabilities owed under a derivative contract shouldtherefore follow the tax treatment of debt release in general (see above “Does the release of debttrigger taxable income for the debtor? If so are there any reliefs or exemptions?”).7. Are there any Pillar 2 considerations to take into account specifically in distressedsituations?Luxembourg has implemented the Pillar 2 Model Rules in domestic legislation, as well as variouspieces of additional OECD guidance, including the part on debt releases.The optional Pillar 2 exclusion of ‘cancellation of debt income’ (CODI) from the GloBE tax baseis more restrictive than the corresponding Luxembourg domestic tax provision on the gaind’assainissement (reference to section “Does the release of debt trigger taxable income for thedebtor? If so are there any reliefs or exemptions?”) and applies only in one of the following factpatterns:▪ There are ongoing statutory insolvency or bankruptcy proceedings supervised byindependent parties. In such case, the CODI from the release of both third-party andrelated party debt is excluded from the GloBE tax base.▪ There is an arrangement with creditors (which must include third parties) to avoid areasonably likely bankruptcy within 12 months if third-party debt is not released. In thiscase as well, the CODI from the release of both third-party and related party debt isexcluded from the GloBE tax base.▪ The debtor’s liabilities exceed the fair market value of its assets immediately before thedebt release. The CODI exclusion only applies to the release from third-party debt andonly up to the lower of (i) the difference between the debtor’s liabilities and the fair marketvalue of its assets and (ii) the reduction in the debtor’s attributes under the tax laws of thedebtor’s jurisdiction resulting from the debt release.Where a group is in scope of Pillar 2, it is therefore key to assess whether debt releases andequitisations can be structured in such a way as to comply with one of the above fact patterns,especially where the domestic tax law provisions would enable a non-recognition of CODI orwould entail a deviation between commercial accounts and tax accounts. The application ofPillar 2 in a restructuring context remains moreover subject to the more general transfer pricingprinciple (which also exists under Pillar 2). The alternatives available to mitigate recognition of6TAX IN DISTRESSED SITUATIONS - LUXEMBOURGdebt waiver income upon debt-for-equity exchange (e.g. requalification into hidden contribution,contribution at face value; we refer to section “What are the key tax considerations on a debt-forequity exchange for the creditor?”) should thus be carefully assessed from a Pillar 2 perspective.DEBT FOR EQUITY EXCHANGE1. What are the key tax considerations on a debt-for-equity exchange for the creditor?The debt-for-equity exchange typically takes the form of a contribution, by the creditor, of thedebt receivable, in exchange for shares in the debtor. Upon the contribution, the contributedreceivable will disappear from the creditor’s balance sheet and will in principle be replaced byshares in the debtor. If the debt is not (entirely) collectible and the contribution occurs at thecollectible value, the creditor will recognize an accounting loss (to the extent the debt had notbeen impaired to fair market value prior to the contribution). If the contribution occurs at nominalvalue, the creditor would generally not recognize an accounting loss since the debt receivableis simply replaced by a (or an increased) participation in the debtor. Such participation may beimpaired, if economically justified, which may give rise to a deductible expense.For tax purposes the contribution (including hidden contributions) must be valued at goingconcern value. It is debated whether such value should be assessed from the creditor’sperspective (lower than nominal, if the debt is distressed) or the debtor’s perspective (whichshould be equal to at least the nominal value). To this date there is no case law dealing with thisspecific question.From a tax perspective, the debtor will generally prefer a contribution at nominal value whereasthe creditor will prefer the contribution to occur at real economic value, as the loss on the debt iscrystallized and appreciation of the shares could, realized only upon future (deemed) alienationcould benefit from an exemption under a participation exemption regime.A potential way to mitigate the risks of discussions on valuation is for the debtor to issue shares(for a total amount equal to the amount of the debt to be swapped for equity) and for the creditorto leave the subscription price outstanding. This creates a payable of the creditor towards thedebtor. This payable can then be set-off against the debt owed by the debtor to the creditor(which has the same nominal value), such that the debt is in effect repaid at nominal, avoiding therealisation of a gain at debtor level. The creditor may thereafter deem it appropriate to book animpairment on the shares.Following a debt-for-equity exchange, the creditor is exposed to the tax consequences of holdingequity in the debtor instead of merely holding a debt instrument.In particular, the repatriation of profits under a debt instrument and under an equity instrumentare subject to different tax considerations. A withholding tax of 15% applies as a principle todistributions made by a Luxembourg corporate entity under an equity instrument, unless theshareholder qualifies for a treaty or a domestic exemption. On the other hand, no withholdingtax is levied as a principle on genuine, arm’s length, interest payments made under a debtinstrument.Similarly, it should be considered whether the newly acquired equity will be held as a longterm or a short-term investment. Subject to treaty protection, a non-resident shareholder of aLuxembourg company is taxable on the disposal of an important participation within 6 monthsof acquiring it. An important participation is a participation of more than 10% in the capital ofthe Luxembourg company held by the seller, alone or, in case of an individual, with his spouse orpartner and underage children, at any time during the five years preceding the disposal.2. What are the key tax considerations on a debt-for-equity exchange for the debtor?We refer to section “What are the key tax considerations on a debt-for-equity exchange for thecreditor?” for further background. In case the debt is not (entirely) collectible, the debt-for-equityswap could result in the realization of a taxable debt waiver gain for the Luxembourg debtor,irrespective of the accounting treatment. In case the creditor is already a shareholder, and thedebt is contributed at its collectible value, the creditor could argue that the accounting profitrealized is to be requalified into a non-taxable hidden contribution, but there is a risk that the taxauthorities disagree with this treatment in case the collectible amount of the debt was below thenominal value. In case the contribution is done at nominal value, there is also a risk that the taxauthorities would consider a contribution at nominal value as a deemed waiver.7TAX IN DISTRESSED SITUATIONS - LUXEMBOURGWhere the debtor is within the scope of Pillar 2, it will be important to consider whether theexchange gives rise to any Pillar 2 impact (see above “Are there any Pillar 2 considerations to takeinto account specifically in distressed situations?”).3. Where warrants or similar instruments are issued as part of a debt restructuring does thistrigger any adverse tax consequences?The rules applying to warrants and similar instruments (such as preferential subscription rights)are particularly complex and the tax consequences of such instruments depend on a case-bycase analysis.Generally, the mere issuance of warrants or similar instruments in the context of a debtrestructuring should not per se trigger adverse tax consequences. If the debtor issues warrantsas repayment in kind of an existing debt, and insofar the market value of the warrants is lowerthan the nominal amount of the initial debt claim, this could be considered as a partial debtwaiver, for which we refer to questions “Does the release of debt trigger taxable income for thedebtor? If so are there any reliefs or exemptions?” and “Can a creditor claim a deduction in respectof any debt that is released?”.Depending on the particular features of the instrument, the exercise of warrants and similarinstruments may result in adverse tax consequences. A case-by-case analysis is required.4. What are the key tax consequences of capital contributions by a parent company into itssubsidiary?A capital contribution to a subsidiary by a parent company is in principle tax neutral froma Luxembourg tax perspective. While under Luxembourg tax rules, in principle, tax followsaccounting, for contributions, the Luxembourg income tax law provides that contributions(including hidden contributions) must be valued at the “going concern value” which generallycorresponds to the fair market value.If the shareholder is investing alongside other investors, particular care should be given to thestructuring of the capital contribution. According to case law, a contribution to a special premiumaccount (so-called “115 account”), which does not involve the issuance of shares, is not sufficientto meet participation exemption thresholds that are based on the cost price of the participation.FEES AND TRANSACTION COSTS1. Is there any adverse tax impact in respect of common restructuring fees, for example,consent fees?Common restructuring fees such as consent fees or backstop fees paid by a Luxembourg debtorshould be treated as regular expenses deductible from the Luxembourg tax base, to the extentthey are at arm’s length. The impact of the payment of such restructuring fees on the interestdeduction limitation rule should also be considered.Backstop fees should generally not attract Luxembourg VAT, whereas consent fees may as aprinciple attract Luxembourg VAT at 17% (subject to VAT localisation rules).2. Are transaction costs deductible for tax purposes and is any VAT recoverable?Transaction costs are in principle deductible from the corporate tax base of a Luxembourgtaxpayer, provided that they are incurred in the corporate interest of the payor. It is noted thatsuch corporate interest may be lacking where the payment is made in place of a related entity.In such cases, the deductibility of the transaction costs may be challenged (unless the payorreceives an appropriate compensation and merely acts as an intermediary).The recoverability of Luxembourg VAT on the transaction costs chiefly depends on the activitiesof the entity requiring the underlying services / goods. As a general rule, if the entity performsactivities granting the right to recover input VAT incurred (e.g., non-EU financing), input VAT ontransaction costs can be at least partially deductible. If it does not perform any activity withinthe scope of VAT (e.g., pure holding entity) or solely performs an activity not granting the right todeduct input VAT (e.g., EU financing), all input VAT should constitute a final cost.8TAX IN DISTRESSED SITUATIONS - LUXEMBOURGDEBT ENFORCEMENT1. Aside from insolvency proceedings, what are the key methods of enforcement and their taximpact?For movable property, the most frequently used security are financial collateral arrangementsgoverned by the Luxembourg Collateral Law of 2005, as amended. The Collateral Law permitsthe enforcement of a pledge over shares, accounts, and claims upon the occurrence of a triggerevent (contractually determinable by the parties and which does not have to be a paymentdefault) without prior notice.Furthermore, upon enforcement, it provides for a variety of in and out of court enforcementprocesses. In practice, the two most commonly used enforcement procedures are (i) theappropriation of the collateral (either by the pledgee or a third party) using a contractuallydetermined valuation method and at a valuation that usually occurs after the appropriation hastaken place and (ii) the private sale at “normal commercial conditions”.Under Luxembourg law, a person who satisfies (whether in part or fully) the debt obligation ofanother person has a right of recourse against such person in the amount of the satisfied debt.In a situation where a person has granted financial collateral securing liabilities of anotherperson, the discharge of such secured liabilities in principle gives rise to a right of recourse. TheLuxembourg Collateral Law expressly allows the provider of the financial collateral to waive,even at the time of the granting of the security, its right of recourse arising under or in connectionwith the enforcement of the financial collateral. In such situation, in case a Luxembourg borroweris discharged of its debt without having a recourse payable, it would realize a taxable debt waiverincome.In case of enforcement by way of appropriation, if the pledgee subsequently realizes a gainon such asset, the latter will be taxable as ordinary taxable income of the pledgee, except ifa specific exemption applies (e.g., in the case of an enforced pledge on shares, participationexemption on the capital gain upon disposal of the shares). Please also refer to ourconsiderations below under “If the enforcement results in the creditor taking ownership of equityor assets, what are the key tax considerations to bear in mind?”.2. If the enforcement results in the creditor taking ownership of equity or assets, what are thekey tax considerations to bear in mind?If the enforcement results in the creditor taking ownership of equity or assets, the taxconsiderations will depend on the type of asset acquired (e.g., shares, bank accounts, IP assets).In the case of enforcement of a share pledge over the shares of a Luxembourg company by wayof appropriation, some of the key tax considerations to keep in mind are the following:▪ Upon appropriation, the creditor should book the newly acquired participation at its fairmarket value. This may trigger a taxable gain or a tax deductible loss depending on thebook value of the assets in the hands of the debtor (except with respect to shares forwhich the gain may be exempt).▪ If real estate is transferred to the creditor, registration duties generally apply.▪ The withholding tax position should be re-considered. Interest payments made by aLuxembourg company are in principle not subject to withholding tax, whereas dividendsare in principle subject to 15% withholding tax, unless a treaty or domestic exemptionapplies.▪ In case of change of control, this may result in the end of a fiscal unity or, under certainconditions, the Luxembourg company may lose its right to carry forward of tax losses.3. Are any specific tax considerations arising on payments or transferring security underguarantees as opposed to the debt?As mentioned in the section “Aside from insolvency proceedings, what are the key methods ofenforcement and their tax impact?”, the payment by the guarantor will trigger a right of recourseclaim against the debtor. In case such right of recourse has been waived, and a Luxembourgborrower is discharged of its debt without having a recourse payable, it would realize a taxabledebt waiver income.9TAX IN DISTRESSED SITUATIONS - LUXEMBOURGIf the guarantee in itself is not at arm’s length, the guarantee payment may give rise to a hiddencontribution (if the guarantee was granted to a direct or indirect subsidiary) or hidden distributionpossibly subject to 15% withholding tax (if the guarantee was granted to a parent or sistercompany).With respect to the release of guarantees see above “Does the release of an uncalled guaranteeobligation trigger any adverse tax consequences? Is the position different if the guarantee hasbeen called?”With respect to Luxembourg tax issues arising on the transfer of security see above “If theenforcement results in the creditor taking ownership of equity or assets, what are the key taxconsiderations to bear in mind?”4. Are there any adverse tax consequences arising from a change of control or break of a taxgroup?The mere change of control does not impact the possibility to use the tax losses carriedforward of the Luxembourg acquired entity. However, if such change of control is coupled withother elements such as, for instance, a discontinuation of the current activity of the companyand exercise of a new profitable activity, an abuse of law may be characterised, and the useof tax losses carried forward may be refused on these grounds. In a genuine third-party debtrestructuring context, where the exercise of a pledge and the change of control is not drivenby the availability of losses carried forward, the risk of challenge should be remote. In casethe acquired entity is part of a fiscal unity (other than in quality of head of the fiscal unity), thechange of ownership results in the exit of that entity from the fiscal unity. If this change occursbefore the expiration of a minimum 5-year period as from the constitution of the fiscal unity,the group companies are re-assessed retroactively to disregard any adjustments related to thefiscal unity regime. If this change occurs after the expiration of the minimum 5-year period, anyadjustments related to the fiscal unity regime are refused only as from the beginning of the taxyear in which the change of ownership occurred.If the new (indirect) shareholder is part of a multinational group in scope of Pillar Two (or if, as aresult of the change of control, the Luxembourg company ceases to be a constituent entity of anin-scope multinational group), Pillar Two tax aspects should be considered.5. Where equity / assets are indirectly transferred as part of an enforcement, does that triggeradverse tax consequences?If there is an indirect change of control of a Luxembourg company because of an enforcementtaking place higher up in the structure, there should be no adverse Luxembourg tax impact(assuming the enforcement is not driven by the desire of the new shareholder to use the taxlosses carried forward of the Luxembourg subsidiary to shelter otherwise taxable income).If the new (indirect) shareholder is part of a multinational group in scope of Pillar Two (or if, as aresult of the change of control, the Luxembourg company ceases to be a constituent entity of anin-scope multinational group), Pillar Two tax aspects should be considered.6. Is any claw back permissible where a distressed company pays taxes for which a solventshareholder is liable?Under Luxembourg tax law, there are no such specific clawbacks.However, under Luxembourg insolvency law, a debtor’s pre-insolvency transactions and corporateacts can be affected by bankruptcy proceedings if they were concluded during the claw-backperiod (période suspecte), which dates back to a maximum of six months from the bankruptcyjudgement. In case the payment of tax on behalf of the shareholder is considered not to be in thecorporate interest of the distressed subsidiary, it cannot be excluded that there would be a clawback on such payment.10TAX IN DISTRESSED SITUATIONS - LUXEMBOURGACQUISITION OF DEBT1. Does the acquisition of a creditor’s interest in distressed debt trigger any adverse direct taxconsequences for the debtor?Where the creditor changes or in the presence of an additional new creditor, the main taxconsequences to be considered by a Luxembourg debtor relate to the interest deductibility.Depending on the jurisdiction of establishment of the new creditor and whether the new creditoris an associated enterprise or not, the tax deduction of interest expenses may be refused.2. Does the acquisition of distressed debt trigger any adverse withholding or indirect taxconsequences for the debtor? The change of creditor under a distressed debt should not per se have an impact on thewithholding tax position of the debtor, assuming that the terms and conditions of the debt remainthe same.3. What are the key tax considerations for the purchaser of a creditor’s interest on theacquisition of distressed debt?Any gains realized by a Luxembourg company acquiring distressed debt constitute regularlytaxable income. In case the gain is offset against interest expenses, the application of the interestdeduction limitation rule (at the level of the acquirer) should be considered. Where the acquirer ofdistressed debt issued by a Luxembourg debtor is not a resident of Luxembourg, the acquisitionof distressed debt should not give rise to specific adverse Luxembourg tax consequences. Fromthe perspective of the Luxembourg debtor, the withholding tax position with respect to the newcreditor should be verified.The acquisition of distressed debt may attract VAT, unless the distressed debt is acquired at aprice below its face value.4. Are there any particular beneficial regimes accessible to a purchaser of a distressed debtportfolio?Under Luxembourg tax law, there are no tax regimes widely accessible to a purchaser ofa distressed debt portfolio. Luxembourg law provides however for a beneficial tax regimeapplicable to securitisation companies, whereby distributions and other payments made toshareholders and investors are not subject to Luxembourg withholding tax and commitmentstowards investors as well as other creditors are in principle deductible for tax purposes. Thelatter deductibility can, however, be curtailed under anti-hybrid rules or interest limitation rules,like for any other regular corporate taxpayer.11TAX IN DISTRESSED SITUATIONS - LUXEMBOURGINSOLVENCY PROCEEDINGS1. What are the key insolvency procedures?Traditionally, under Luxembourg insolvency laws, three types of proceedings may be openedagainst a Luxembourg company:▪ bankruptcy proceedings (faillite),▪ controlled management proceedings (gestion contrôlée), and▪ composition proceedings (concordat préventif de la faillite).Luxembourg has recently modernized its insolvency law through the addition of a new in-courtprocedure, the judicial reorganisation procedure (procédure de réorganisation judiciaire).2. What are the key tax considerations arising upon entry into an insolvency procedure?Upon bankruptcy, the company remains subject to the ordinary corporate income tax regimeimplying, inter alia, the obligation to annually file a corporate income tax return. This obligationrests on the directors of the company, who can be held liable in case of fault or negligence in thefiling of the tax return (please refer also to the considerations below under “Are directors or othermanagers personally liable for tax debts in an insolvency?”.Under certain conditions, debt waivers granted in view of the financial recovery of the debtormay benefit from a preferential tax treatment (see above under “Does the release of debt triggertaxable income for the debtor? If so are there any reliefs or exemptions?”)3. Does entry into an insolvency procedure impact tax groupings?The mere entry into an insolvency procedure does not per se have an impact on the fiscal unity.However, if the insolvency procedure results in the liquidation of one of the members of thefiscal unity, this could potentially have a significant and sometimes retroactive tax impact. Twoconditions of the fiscal unity regime are particularly relevant in this context:▪ The members of the fiscal unity must commit to stay in the fiscal unity for a minimalperiod of five accounting years. In line with this condition, if the fiscal unity has validly beenin place for at least five years, broadly speaking any potential tax impact should be limitedin time to the first accounting period in which the conditions of the fiscal unity regime areno longer met (either by the integrating company or an applicable integrated company). Onthe contrary, if the fiscal unity has not been in place during this minimal period, the fiscalunity would be retroactively “broken”.▪ All the members of the fiscal unity must open and close their accounting year at the samedate. It follows from this that in case one of the members of the fiscal unity closes itsliquidation the fiscal unity conditions are no longer met as from that year. If this happensduring the minimal five-year period, the fiscal unity is retroactively “broken”.4. Are there any specific tax set offs available in an insolvency?Luxembourg tax law does not provide for any specific tax compensation or set-off mechanismsin case of insolvency. However, it can generally be expected that the insolvent company has taxlosses carried forward which could be used to offset, e.g., taxable debt waiver gains.5. Is the tax authority a preferential creditor in an insolvency?The tax authority is a preferential creditor in case of insolvency, benefitting from both a generalfirst ranking security on all the movable assets of the debtor (“privilège du trésor”) as well as alegal mortgage (hypothèque) on the (current and future) real estate assets of the debtor.In addition to this, the tax authorities have certain special prerogatives to recover the tax debt inan insolvency procedure compared to unsecured creditors, such as for instance the absence ofan obligation to register their claim with the receiver and the absence (at least during a certainamount of time) of an obligation to register their mortgage.12TAX IN DISTRESSED SITUATIONS - LUXEMBOURG6. Are directors or other managers personally liable for tax debts in an insolvency?In certain circumstances, including during insolvency procedures, directors and other managerscan be held jointly and personally liable towards the tax authorities for the payment of thecompany’s taxes. The tax authorities can in these cases issue a guarantee call tax assessment(“bulletin d’appel en garantie”) to a director. In cases of plurality of directors, the tax authoritiesmay address the guarantee to any of the directors.The issuance of a guarantee call assessment is subject to certain conditions. In particular the taxauthorities should be able to prove a serious misconduct of the director and a link between suchserious misconduct and the nonpayment of taxes by the company.According to case law, directors and managers could be liable to pay the tax debts of thecompany if they have not taken appropriate action, or have taken action too late, prior to thecompany becoming insolvent. In that case, the serious misconduct was characterised by thenegligence of the director in filing the annual accounts and the tax returns of the company during14 years prior to the company becoming insolvent.WEIL CONTACTSLondonUnited StatesFranceEdouard de LamyPartner, TaxParis+33 1 4421 [email protected] WalkerPartner, TaxLondon+44 20 7903 [email protected] BodohPartner, TaxWashington, D.C.+1 202 682 [email protected] PiquePartner, TaxParis+33 1 4421 [email protected] PariPartner, TaxWashington, D.C.+1 202 682 [email protected] SternbergCounsel, TaxNew York+1 212 310 [email protected] GoldringPartner, TaxNew York+1 212 310 [email protected] PibworthCounsel, TaxLondon+44 20 7903 [email protected] THE AUTHORS OF OUR JURISDICTIONAL GUIDESAnna RitchieAssociate, TaxLondon+44 20 7903 [email protected] & LOEFF CONTACTSThe NetherlandsLuxembourgSwitzerlandBartjan ZoetmulderPartner - Tax AdviserT +44 20 7826 3071M +44 7879 607 [email protected](Currently on assignment in London)Aziza TissirSenior Associate - Tax AdviserT +31 10 22 46 593M +31 6 53 42 48 [email protected] BretelerAssociate - Tax AdviserT +31 20 578 53 01M +31 6 22 59 37 [email protected] HijdraSenior Associate - Tax AdviserT +31 20 578 51 93M +31 6 10 89 57 [email protected] KleinCounsel - Tax AdviserT +31 20 578 5045M +31 6 51 42 67 [email protected] BaumgartnerPartner - Attorney at LawT +41 43 434 67 00M +41 79 93 06 [email protected] HammererSenior Associate - Tax AdviserT +44 207 826 3070M +41 79 878 62 [email protected](Currently on assignment in London)BelgiumBenno DaemenCounsel - Attorney at LawT +32 2 773 23 67M +32 497 32 99 [email protected] EngelsPartner - Attorney at LawT +32 2 743 43 92M +32 496 13 76 [email protected] HodirevaAssociate - Tax AdviserT +312 057 853 27M +352 6 91 96 31 [email protected]évin EmerauxPartner - Tax AdviserT +352 466 230 570M +352 6 91 96 32 [email protected] KlethiPartner - Tax AdviserT +352 466 230 429M +352 6 91 96 31 [email protected] THE AUTHORS OF OUR JURISDICTIONAL GUIDES© 2026 WEIL, GOTSHAL & MANGES LLP AND LOYENS & LOEFF. ALL RIGHTS RESERVED. QUOTATION WITH ATTRIBUTION IS PERMITTED. THISPUBLICATION PROVIDES GENERAL INFORMATION AND SHOULD NOT BE USED OR TAKEN AS LEGAL ADVICE FOR SPECIFIC SITUATIONS THAT DEPENDON THE EVALUATION OF PRECISE FACTUAL CIRCUMSTANCES. THE VIEWS EXPRESSED IN THESE ARTICLES REFLECT THOSE OF THE AUTHORS ANDNOT NECESSARILY THE VIEWS OF WEIL, GOTSHAL & MANGES LLP AND LOYENS & LOEFF.CLICK HERE for more guides providing a high-level overview of important tax considerations for debt restructurings, enforcement, acquisitions of debt and insolvencyproceedings for both debtors and creditors from UK, US, French, Luxembourg, Swiss, Belgian and Dutch tax perspectives.