On 23 May 2024, the Luxembourg government filed a bill of law and a draft of Grand Ducal regulation notably to (i) further clarify the tax treatment of share class redemptions following two judgments issued in 2023; (ii) amend the minimum net wealth tax rules to comply with the Constitutional Court decision issued at the end of 2023; and (iii) give taxpayers the option to waive the benefit of the participation exemption regime under specific circumstances. The proposals, once voted and entered into force, would provide additional legal certainty to a wide range of taxpayers.
Background
The Luxembourg government explains that the purpose of the bill of law is to propose specific adjustments, firstly, to consider certain developments in case law for which legislative amendments were required and, secondly, to increase legal certainty.
Key elements
Minimum net wealth tax (NWT)
The minimum NWT rules would be amended effective 1 January 2025 to comply with the Constitutional Court ruling 185/23 of 10 November 2023 (for more information, see our prior newsflash). The structure of the minimum NWT would be simplified by replacing the current two minimum NWT systems with a single system based exclusively on the criterion of the taxpayer's balance sheet total. Therefore, taxpayers whose total balance sheet:
- does not exceed EUR 350,000 would be liable to minimum NWT of
EUR 535 (as is currently the case);
- is higher than EUR 350,000 but does not exceed EUR 2,000,000 would be subject to a lower minimum NWT of EUR 1,605 rather than the current EUR 4,815 applicable to most holding and finance companies;
- exceeds EUR 2,000,000 would be liable to minimum NWT of EUR 4,815 (which becomes the new maximum amount, compared to a previous maximum of EUR 32,100).
Clarification on the tax treatement of share class redemptions
As a response to last year's case law developments from the Luxembourg administrative tribunal (for more information, see our prior newsflash), the bill of law introduces a clarification: a redemption of an entire class of shares qualifies as partial liquidation within the meaning of article 101 of the income tax law, provided that the following conditions (which were largely reflected in the 2023 judgments) are cumulatively met:
- The share class is cancelled entirely and within six months of
its repurchase;
- The share classes were set up either at incorporation or upon a
share capital increase;
- Each class of shares has different economic rights, as defined
in the articles of association. The commentary to the bill puts
forward that classes of shares can be considered to have distinct
economic rights notably in the following cases: (a) each share
class entitles the holder(s) to (different) preferential dividends;
(b) each share class gives an exclusive right to profits for a
different determined or determinable period; or (c) each share
class carries financial rights that are linked to the performance
of one or more of the entity's direct or indirect assets or
activities; and
- The redemption price for a class of shares, which should reflect the fair market value of the shares at redemption date, can be determined based on criteria laid down in the artcles of association or another document referred to in the articles. This last criterion is a response to the case law requiring that price for the redemption of a class of shares is set at arm's length.
The bill of law provides that when the share class being repurchased is (also) held by an individual who holds an important participation (as defined in Luxembourg tax law), the identity of the individual must be reported in the annual tax return of the distributing company. The commentary to the bill of law points out that the proposed changes do not impact the way an important participation is determined: the threshold of more than 10% remains relative to the entire share capital and not relative to the capital of a share class.
The commentary to the bill further recalls that the general anti-abuse rule remains applicable to share class redemptions where such redemption has as main or one of the main purposes the avoidance of tax in artificial situations.
This clarification should apply to any share class redemption that occurs as from the publication of the adopted bill of law.
Possibility to waive total or partial exemption of tax on dividend and capital gains derived from certain shareholdings
Luxembourg tax law currently provides for a 50% dividend exemption regime for dividends and a full participation exemption (for corporate taxpayers) on dividends and capital gains if certain conditions are met. The proposed amendments would allow taxpayers to waive the benefit of the 50% exemption and of the full exemption for income from shareholdings meeting only the EUR 1.2 million (for dividends) or EUR 6 million (for capital gains) holding threshold but not the 10% threshold. This option would allow taxpayers to reduce mismatches between the Luxembourg participation exemption regime and other participation exemption regimes, and should also help reducing the accumulation of tax losses carried forward (if the taxpayer opts to use the losses rather than benefiting from the exemption).
Any waiver would have to be made individually for each tax year and for each participation. These amendments would apply as from tax year 2025.
Electronic filing of withholding tax returns as regards directors' fees and wage withholding tax
As part of efforts to modernise and streamline the tax compliance and assessment procedures, paper filing will be replaced by mandatory electronic filing of tax returns as from 1 January 2025 for withholding tax on directors' fees ('tantièmes') and withholding tax on wages and pensions.
Next steps
The bill of law will be debated in Parliament and may be amended before the expected vote later in 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.