Onshore 2 Offshore

In Guardian Industries Corp. vs United States (No 02-1936T (Fed. Cl. March 31 2005)) the US Federal Court of Claims allowed the US taxpayer, Guardian Industries, to claim credits for tax paid by its wholly-owned Luxembourg subsidiary, Guardian Industries Europe (GIE), a Luxembourg SARL. The stock of GIE was owned by Interguard Holding Corp (IHC), a Delaware corporation that was a member of the Guardian Industries US Group. GIE is a holding company for a number of Luxembourg subsidiaries, and had paid Luxembourg tax under the local group consolidation rules. The Luxembourg tax authorities treated GIE and the Luxembourg subsidiaries as a fiscal unity under Art. 16bis of the Loi de l'impot sur le revenue.

Since GIE had elected for fiscal transparency (check-the-box under Treasury Regulations section 301.7701-3), for US tax purposes, the tax imposed on the Luxembourg parent company was seen as imposed directly on the US parent company and the taxpayer argued that this tax was creditable in the US. The Luxembourg operating income, however, could remain in the various Luxembourg operating subsidiaries and if so, would not be taxable on a current basis in the US (unless otherwise subject to subpart F or another anti-deferral regime).

The IRS argued that the US parent company was not entitled to take a current tax credit, pointing to Treasury Regulations section 1.901-2(f)(3), which requires foreign taxes be attributed to all the members of a group, if the members are jointly and severally liable for the tax. The court however opined that only the Luxembourg parent company was liable under Luxembourg law, and thus the tax was attributed to the Luxembourg parent (and for US tax purposes to the US parent) and not to the Luxembourg operating subsidiaries.

The Court of Federal Claims disagreed with the IRS based on reports presented by tax experts in Luxembourg who advised the Court that GIE alone was legally liable for the Luxembourg taxes. The liability of GIE was based on Art. 164bis of the LIR and the Grand-Ducal decree of 1 July 1981. The Grand-Ducal decree specified that the parent company of a Luxembourg corporate group was liable for the combined corporate income tax of the group. The Court rejected the application of Sec. 7 of the Steueranpassungsgesetz (StAnpG), which would have resulted in joint and several liability for the group members.