Key issues

Preparation

What measures should be taken to best prepare for a corporate reorganisation?

Planning is a key aspect of ensuring an efficient implementation and generally includes:

  • commercial and strategic planning;
  • setting up communication lines both with advisers and internally, with managers and directors of the companies involved;
  • performing due diligence exercises (eg, tax, legal, accounting or financial);
  • valuation exercises (eg, transfer pricing analysis);
  • identifying any regulatory, commercial or legal issues or barriers (eg, filing with authorities or mandatory terms that may apply to certain corporate actions);
  • adjusting a timeline and preparing legal step plans; and
  • setting up a virtual data room or communication method to provide access to draft and execution versions of the reorganisation materials.
Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

A corporate restructuring does not in itself constitute a ground for dismissal. The transfer of undertakings for the protection of employment (TUPE) regulations require all employees to be transferred to the acquiring entity in case of restructuring. Employers have a limited right to dismiss employees for economic or performance reasons, but the dismissal cannot be a direct consequence of the transfer.

Since 1 January 2007, companies considering job cuts may have to discuss with employee representatives a ‘job retention plan’, designed to provide for alternative measures to dismissals.

Collective dismissal occurs when a company plans to make at least seven redundancies for economic reasons over a period of 30 days or at least 15 over a period of 90 days. The qualification of collective dismissal entails for the company the obligation to respect, before any notification of the dismissals, a particular procedure consisting in negotiating with employee representatives measures to reduce the number of dismissals or to mitigate the consequences, with a view to the eventual conclusion of a social plan.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

The TUPE regulations require all obligations arising from an employment contract to be transferred to the acquiring entity, including pension rights. Other employee benefits must also be transferred, but can be lightly amended with the consent of the employee if the acquiring entity is unable to provide equivalent benefits.

The concept of ‘pre-pension’ is also covered by Articles L582-1 and following of the Labour Code. Pre-pensions should not be confused with the early retirement pension. The early retirement pension is covered by social security law, while pre-pension is covered by labour law.

One type of pre-pension is the so-called ‘pre-pension adjustment’. It is applicable to 57-year-old private sector employees. An employer may request the admission of its staff to the pre-pension adjustment following the loss of jobs resulting from a corporate reorganisation.

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

Under Luxembourg law, financial assistance consists of a company advancing (directly or indirectly) funds, granting loans or providing securities in relation to the acquisition of its shares by a third party. 

The Luxembourg law on commercial companies prohibits (subject to the provisions of a limited whitewash procedure) public limited liability companies (société anonyme),  partnerships limited by shares (société en commandite par actions), simplified joint-stock companies (société par actions simplifiées) and European companies (société européenne) from providing financial assistance to a third party for the acquisition of their shares. However, the law (while this topic remains subject to discussions among legal authors) does not extend the prohibition to private limited liability companies (société à responsabilité limité), which are the most-used form of companies in Luxembourg.

While the scope of the prohibition of financial assistance in Luxembourg is limited to certain types of companies, financial assistance considerations are still relevant in reorganisations, notably where loans, capital contributions or securities are being granted.

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

Due to the international nature of almost all corporate reorganisations in Luxembourg, the most commonly overlooked issues concern compliance with the applicable transfer and assignment provisions, and the post-completion registration and filing approvals. Similarly, the need for valuations and establishment of (interim) accounts and calculation of distributable amounts are often overlooked, and the time required for them is frequently underestimated. These issues could be easily covered in the early stages of the reorganisation by considering the local accounting implications of the contemplated steps. Ideally, these should be confirmed in advance with the accounting team and the tax adviser to ensure the accounting treatment is consistent with the objectives of the reorganisation.

Frequently asked questions typically include those regarding which value to apply, what legal or statutory reserves apply and which type of restructuring method is preferable from a timing perspective.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

From a Luxembourg accounting perspective, corporate reorganisations will, in principle, be considered as a liquidation/disposal of the entire business. Consequently, target assets may be valued at estimated realisation value, defined by Article 27(2) of the Luxembourg income tax law as the price that a party buying this asset would have paid under normal market conditions for this particular asset (ie, the fair market value).

Target businesses may also be valued at operating value, which is defined by Article 27(1) of the Luxembourg income tax law as the price that a party buying the entire business as a going concern would give to a particular asset when allocating the total purchase price to the individual assets composing the business.

Although both concepts are similar, the estimated realisation value and the operating value can, depending on the circumstances, produce different valuation results for particular assets.

Under certain conditions, target assets or businesses may also be valued at book value in domestic reorganisations or in an EU context. Assets and businesses will thus be valued at the same value they were accounted for, in the accounts of the absorbed, transferring or demerged company. This tax-neutral regime is generally available if Luxembourg retains the right to tax the deferred gain.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

The accounting value for which the corporate reorganisation will be carried out has significant importance, as a corporate reorganisation may be carried out either at book value or fair market value (depending on the eligibility of a reorganisation for a tax-neutral regime).

From a Luxembourg tax perspective, a corporate reorganisation may in general result in a taxable gain corresponding to the difference between the book value of the assets or businesses subject to the reorganisation and their fair market value.

Under EU Directive 2009/133/EC, the corporate reorganisation may be realised at book value and benefit from a tax-neutral regime (thus not resulting in any taxable gain) if the following principal conditions are met:

  • Luxembourg must retain the right to tax the deferred gain – this condition is met if the absorbing or beneficiary company, or the entities resulting from the corporate reorganisation, are generally considered as fully taxable companies tax resident in Luxembourg or in an EU country;
  • The corporate reorganisation must, in general, be carried out in exchange of the allocation of shares; and
  • A cash payment received as a consequence of such corporate reorganisation must not exceed 10% of the nominal value of the shares.

In the event of a merger, if the absorbing company has had a participation of at least 10% in the absorbed company, the gain realised on the cancellation of such shares should, in principle, be tax exempt in accordance with Article 171(3) of the Luxembourg income tax law.

The existence of a significant amount of carried forward losses in the entity which is absorbed, demerged, or transferred should also be considered. Regarding the use of carried forward losses, Article 114(3) of the Luxembourg income tax law provides that losses may be used only by the company which has initially suffered them.

New exit taxation rules, which will come into force on 1 January 2020 in Luxembourg, may also apply in relation to the transfer of assets, a permanent establishment, or the registered office or central administration of a Luxembourg tax-resident company out of Luxembourg. Such transfers will in principle be considered as a disposal at fair market value of the relevant assets and businesses, which may result in a taxable gain upon the transfer.

The payment of any Luxembourg tax triggered by the transfer may under certain conditions be paid over a period of five years if the transfer is to an EU member state or a European Economic Area state with which Luxembourg has concluded an agreement on the recovery of taxes.