The Luxembourg government proposes tax amendments providing clarity and legal certainty

On 23 May 2024, the Luxembourg government presented a draft bill of law to the Parliament (Projet de loi n° 8388 du 23 mai 2024, the “Bill of Law”), which amends and clarifies specific tax law provisions.

Introduction

The Bill of Law aims to amend the Luxembourg income tax law (loi concernant l’impôt sur le revenu or “LIR”), the general tax law (Abgabenornung or “AO”) and the net wealth tax law (“NWT Law”) regarding inter alia the following key topics:

1. Clarification of the tax treatment applicable to the redemption of classes of shares;
2. Simplification of the current minimum net wealth tax (“Minimum NWT”) calculation rules;
3. Introduction of an optional waiver on the (partial or full) tax exemption on dividends.

The text also proposes to make mandatory the electronic filing of tax returns for withholding tax (“WHT”) on directors’ fees (tantièmes) and for the WHT on wages and pensions, which are some of the last instances where paper filing remains currently possible.

Clarification of the tax treatment applicable to the redemption of classes of shares

In the course of last year, the Luxembourg administrative tribunal issued two judgements (Tribunal administratif, 27 January 2023, n°42432 and 14 June 2023, n°45759) providing guidance on the tax treatment of the redemption of a class of shares. 

The Bill of Law proposes to specify within the LIR the conditions under which the redemption of a full class of shares can be treated as partial liquidation for Luxembourg tax purposes.

For that purpose, the following cumulative conditions must be met:

• The redemption must apply to an entire class of shares; further to the redemption, the entire class of shares should be cancelled within 6 months;
• The classes of shares should be implemented upon the company’s incorporation or upon a share capital increase;
• Each class of shares should have different economic rights; and
• The method to determine the fair market value of the class of shares to be redeemed should be included either (i) in the articles of association of the company or (ii) in a document referred to in those articles. 

While the existence of strong business reasons supporting the redemption of a class of shares (as mentioned in the above-mentioned tribunal decisions) is not included in the proposed tax reform, the parliamentary works of the Bill of Law recall that the redemption of a class of shares may still fall under the general anti-abuse rule or within the concept of abuse of law if it has, as main purpose, or one of the main purposes, obtaining a tax advantage that defeats the object or purpose of the applicable tax law. 

Finally, in case of the redemption of a full class of shares in which an individual holds an important participation (more than 10% in the share capital of the Luxembourg company), the identity of the individual will have to be reported in the company's annual tax return. 

The amendment of Article 101 of the LIR should in principle be applicable as from the adoption of the Bill of Law. Once adopted, the above rules will apply to any share class redemption carried out as from the publication of the law. 

Simplification of the current Minimum NWT calculation rules

Following the decision by the Luxembourg Constitutional Court 185/23 of 10 November 2023, which discusses the unconstitutionality of some aspects of the Luxembourg Minimum NWT calculation rules, the Bill of Law proposes amendments simplifying those rules. 

Based on the principle of equal treatment (as provided by the Luxembourg Constitution), no distinction should be made between SOPARFIs and other corporate taxpayers for the purpose of the computation of their Minimum NWT. 

Under the proposed tax reform, (all) Luxembourg taxpayers will be subject to the Minimum NWT computed as follows:

With this proposal, the highest amount of Minimum NWT to be paid by a Luxembourg corporate taxpayer would be EUR 4,815 (compared to EUR 32,100 as currently applicable). 

If adopted, this amendment to the NWT Law should be applicable as from 1st January 2025 (i.e., the next NWT triggering date). 

Introduction of an optional waiver for tax exemptions on dividend income

To the extent certain conditions are observed, the current provisions of the LIR include a non-optional  50% dividend exemption and a full dividend (and capital gains) participation exemption (the latter, for Luxembourg fully taxable corporate taxpayers).  

The Bill of Law provides the option for corporate taxpayers to waive the benefit of the aforementioned income tax exemptions. That being said, as far as the participation exemption is concerned, this option would only apply to participations meeting the minimum shareholding requirement¹ on the basis of the acquisition price. 

The waiver option would have to be made on an annual basis and for each participation. 

These new rules would inter alia allow to align the Luxembourg participation exemption with other exemption regimes. To a certain extent, making these exemptions optional may also allow taxpayers to use their available tax losses carried forward, if need be. 

If adopted, most of the amended provisions should be applicable as from fiscal year 2025.

 
[1] For Luxembourg participation exemption purposes, the minimum shareholding requirement is met if the Luxembourg company holds at least 10% of the share capital in a qualifying subsidiary or a participation with an acquisition price of EUR 1,200,000 for the exemption of dividends; EUR 6,000,000 for the exemption of capital gains.