MRPS found to be equity for Lux tax purposes

The highest Luxembourg tax court concluded that the mandatorily redeemable preferred shares (MRPS) issued by a Luxembourg company to its sole shareholder qualified as equity, rather than the dividends giving rise to interest deductions (based on their alleged economic substance). Although the MRPS had some debt-like features (10-year maturity, no voting rights except as provided under the Luxembourg commercial law, and cumulative and preferred fixed dividends), the court considered that the MRPS involved no evident mismatch between the legal form adopted (share capital) and the underlying economic reality of the provision of funds by a single shareholder to its subsidiary.

The court also emphasized that the preferred dividends depended on there being a net profit after payment of the company’s creditors (thus placing the MRPS holder on a different footing than a creditor) - and furthermore, the company had treated the MRPS as equity in its financial statements.

Neal Armstrong. Summary of Alex Pouchard and Paloma Nunez, “Luxembourg Court Rules on the Tax Treatment of MRPS,” International Tax Highlights (IFA Canada), Vol. 1, No. 2, August 2022, p. 5 under s. 113(1)(a).