As the COVID-19 pandemic is still disrupting businesses in continental Europe, including the Grand Duchy of Luxembourg, the Luxembourg government continues to encourage social distancing and home-office whenever possible. In this context, the Luxembourg parliament adopted a new law on 23 September 2020 to extend the measures allowing virtual meetings until 31 December 2020. This new law is essentially an extension of the law of 20 June 2020.
What are the measures?
A company may continue, notwithstanding any provision to the contrary in its articles of association and irrespective of the expected number of shareholders participating in the general meeting, hold any general meeting without a physical meeting, and may require its shareholders and other attendees to attend the meeting and exercise their rights exclusively:
- by a vote in writing or in electronic form (allowing the identification of the voter), provided that the full text of the resolutions or decisions to be passed has been published or otherwise communicated to the participants; or
- by video conference or any other means of telecommunication allowing the identification of the participants; or
- by way of a proxy designated by the company.
These provisions are equally applicable to meetings of bondholders.
Regarding listed entities subject to the Luxembourg law of 24 May 2011 on the exercise of certain rights of shareholders in listed companies, as amended, if a shareholder (or another participant) has already appointed a proxy other than the person referred to in point 3. above, such proxy may only participate in the meeting in the forms provided for in points 1. and 2. above. The proxy designated by the shareholder could possibly also participate in the meeting by granting a power of attorney to the proxy designated by the company in compliance with point 3. above, provided that the power of attorney granted by the shareholder allows its proxy to do so.
The same flexibility applies to meetings of the other corporate bodies of a company (e.g., board of managers or directors and supervisory boards), other than the general meeting, which may, notwithstanding any provision to the contrary in the articles of association of such a company, hold their meetings by:
- adopting written circular resolutions; or
- videoconference or other means of telecommunication enabling the identification of the members participating in the meeting.
No new measures are adopted by the new law. It means in particular that:
- Corporate bodies of a company will have to continue complying with the legal requirements and provisions of its articles of association regarding the number and frequency of the meetings, the convening formalities as well as the quorum and majority required to pass a decision. The attendance of a participant using any of the measures allowed by the new law shall be counted for the calculation of said quorum and majority.
- There is no extension of any sort of deadline regarding the holding of general meetings, in particular annual general meetings and the filing of annual accounts. On this topic, the law of 22 May 2020 has already extended to three months the deadlines for the holding of the annual general meetings and the filing and publication of the annual accounts.
What about potential tax impacts due to lack of substance?
Whilst these flexible measures are of course welcome, the question arises as to what extent this may lead to adverse tax consequences. Indeed, the flexibility provided to Luxembourg companies to hold their shareholders and board meetings without a physical presence in Luxembourg may jeopardize the substance of these companies. This could in turn create foreign permanent establishment issues, or even result in the Luxembourg company being considered as a foreign company for tax treaty purposes, as in the tax treaty context the place of effective management is generally taken into account to determine the residency of a company.
Although this issue has not been dealt with by the Luxembourg government or tax administration, the Organization for Economic Cooperation and Development (“OECD”) issued helpful guidance on 3 April 2020, indicating that it is unlikely that the COVID-19 pandemic will create any changes to an entity’s residence status under a tax treaty due to the inability for managers or directors to travel and thus to attend meetings physically. This approach is based on the fact that the current flexible measures are due to an “extraordinary and temporary situation” as a result of the pandemic. As a consequence, the fact that corporate decisions are currently taken outside from Luxembourg due to the COVID-19 pandemic, which could be construed as a change of the place of effective management from a tax perspective, should not currently have any impact on the Luxembourg tax residency of a company.
Considering the “extraordinary and temporary” situation referred to in the OECD guidance, it is helpful that the new law only extends these exceptional measures for three months based on the current situation, highlighting indirectly that these measures remain an exception and are to be considered as temporary.
Notwithstanding the above, the potential lack of substance of a company should nevertheless be analysed on a case-by-case basis, not only from a local perspective but also from a foreign tax point of view (e.g., where the directors/managers or shareholders are located), by considering also the substance of the company prior to the crisis. Further, foreign tax administrations may have issued guidance not fully in line with the OECD guidance. With the help from our offices located all around the world, Hogan Lovells is well equipped to assist you in this context.
The extension of the aforementioned measures until 31 December 2020 is welcome and shows once again the responsiveness of the Luxembourg government and legislator to the evolution of the pandemic. The extension is however limited to a period of three months, thereby confirming that those measures are temporary in essence and of exceptional nature. This is in fact helpful from a tax perspective as explained above. However, there is little doubt that the government will introduce another bill before 31 December 2020 to temporarily extend those measures if the sanitary crisis worsen or stay as it is. One may need to consider at that time the risk if additional extensions may be considered as suddenly becoming the “new normal”, thus triggering unwelcome tax issues.
This article was authored by: Gérard Neiens, Emmanuel Lamaud, Pierre-Luc Wolff and Kim Tang