In our previous articles, we looked at when consolidation becomes relevant and what it involves in practice for a group.
When a company controls one or more subsidiaries, this does not necessarily mean that it must prepare consolidated financial statements. Luxembourg law provides for several exemptions, as well as certain situations in which a subsidiary may be left outside the consolidation scope.
The developments below concern the general regime applicable to commercial companies; certain regulated sectors and investment vehicles are subject to specific rules.
In this article, the term “Member State” is used within the meaning of Luxembourg law: it covers Member States of the European Union as well as the other States party to the Agreement on the European Economic Area.
The exemption for small groups
This is the most common exemption.
A parent company may be exempt from preparing consolidated financial statements when the parent company and its direct and indirect subsidiaries do not exceed at least two of the following three thresholds:
- balance sheet total: EUR 25,000,000;
- net turnover: EUR 50,000,000;
- average number of employees in full-time equivalents (FTE): 250.
The test covers the parent company and the subsidiaries that would have to be consolidated. Entities under joint control or significant influence are not taken into account.
In principle, exceeding or falling below at least two of these three thresholds must occur for two consecutive financial years before it takes effect.
To perform this test without first preparing a full consolidation, the accounts of the parent company and its subsidiaries can simply be added together. In that case, the thresholds for the balance sheet total and net turnover are increased by 20%, resulting in:
- balance sheet total: EUR 30,000,000;
- net turnover: EUR 60,000,000;
- average number of employees in full-time equivalents (FTE): 250.
This increase provides a simplified way of taking into account certain consolidation eliminations that could reduce these amounts.
In practice, it is common to disclose this exemption in the notes to the parent company’s annual accounts to explain why no consolidated financial statements are prepared. This disclosure is not, however, a legal condition for the exemption.
The exemption for sub-groups
A Luxembourg parent company may itself be a subsidiary of a larger group.
In that case, it may be exempt from preparing its own consolidated financial statements when its sub-group is already included in consolidated financial statements prepared by a parent company higher up in the group.
In practice, it is important to check that:
- the Luxembourg company and its subsidiaries are included in the consolidated financial statements of the higher-level group;
- those consolidated financial statements are audited;
- the consolidated financial statements of the higher-level group, the audit report and, where applicable, the consolidated management report are filed with the Luxembourg Trade and Companies Register (RCS) for publication;
- the notes to the Luxembourg company’s annual accounts disclose the exemption and the name and registered office of the parent company preparing the consolidated financial statements.
Where the higher-level parent company is governed by the law of a Member State and holds at least 90%, but less than 100%, the other shareholders or members must approve the exemption.
In other cases, shareholders or members representing at least 10% of the capital of an SA or SCA, or 20% of an SARL, may request the preparation of consolidated financial statements no later than six months before the end of the financial year.
Where the parent company preparing the consolidated financial statements is not governed by the law of a Member State, the accounting framework used must also be considered. IFRS and US GAAP, for example, are recognised as equivalent, while other accounting frameworks may require further analysis.
An important limitation: securities traded on a regulated market
The exemptions described above may be restricted where securities issued by the companies concerned are admitted to trading on a regulated market in a Member State.
For the small group exemption, it cannot be applied where the parent company or one of its subsidiaries to be consolidated has issued such securities, for example shares or bonds.
For the sub-group exemption, this restriction applies to securities issued by the Luxembourg parent company seeking to benefit from the exemption.
When all subsidiaries can be left outside the consolidation scope
Luxembourg law also provides for an exemption where all of the parent company’s subsidiaries can be left outside the consolidation scope.
This may be the case, in particular, where:
- the subsidiaries are not material, including when considered together;
- severe and long-term restrictions substantially limit the parent company’s ability to exercise its rights over the assets or management of a subsidiary;
- the information required for consolidation cannot be obtained without disproportionate cost or undue delay;
- the shares or interests in a subsidiary are held exclusively with a view to their subsequent disposal.
Excluding certain subsidiaries does not, in principle, exempt the parent company from preparing consolidated financial statements. However, where all of its subsidiaries can be left outside the consolidation scope, the parent company may be exempt from this obligation.
The case of subsidiaries held exclusively with a view to their disposal is particularly relevant for certain investment structures and requires specific analysis.
Quick check
Does a parent company control one or more subsidiaries?
If so, the following questions can help guide the analysis:
- does the group remain below the size thresholds?
- is the Luxembourg parent company already consolidated within a larger group?
- does the admission of securities to trading on a regulated market in a Member State prevent the relevant exemption from being applied?
- can all subsidiaries be left outside the consolidation scope?
If no exemption can be applied, consolidated financial statements will generally need to be prepared.
Conclusion
Controlling a subsidiary means that consolidation becomes relevant, but it does not necessarily mean that consolidated financial statements must be prepared.
The size of the group, its inclusion within a larger group or the possibility of leaving all of its subsidiaries outside the consolidation scope may result in an exemption.
These exemptions are subject to specific conditions. Where there is any doubt, a targeted review of the group structure can usually determine quickly whether consolidated financial statements need to be prepared.
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This article was co-written with B&R Consulting.