Luxembourg: amendments to key tax law provisions expected in 2025
12 December 2024 - Earlier this year, the Luxembourg government issued draft bill of law n°8388 with the aim of making changes and clarifications to certain tax law provisions, namely income tax, general tax and net wealth tax. If the amended provisions are adopted then they are expected to take effect from fiscal year 2025.
The proposed changes
1. Tax treatment of redemption of share classes
Firstly, the draft bill seeks to clarify the tax treatment that applies to the redemption of share classes by codifying some recent 2023 judgments. If adopted, the law will enter into effect on the 1st of January 2025.
Currently Article 101 (1) Luxembourg Income Tax Law (LITL) states that the whole or partial liquidation of a Luxembourg company is treated, if in the hands of a substantial interest shareholder (with a holding of more than 10% of the share capital) as an alienation of the shares, which can then be treated as a capital gain or loss. Dividend withholding tax (15%) is not applicable on capital gains.
Further to this, a redemption of an entire class of shares can – if the conditions are met – also be treated as a partial liquidation and therefore classified as a capital gain in the hands of the shareholder and not as a dividend.
The draft law amends Article 101 LITL and provides that a share class redemption is treated as a partial liquidation provided that the following conditions are met:
- The redemption concerns the entire class of shares and is followed by a related corresponding reduction of capital of the share class within 6 months of the redemption;
- The share classes are created upon incorporation or in a subsequent increase of share capital;
- Each class of shares has specific economic rights, as defined in the articles of association, which are distinct from the other share classes;
- The redemption price can be fixed based on criteria laid down in the articles of association, or other documents referred to in the articles of association, to determine the fair market value of the class of shares at the time of the redemption.
The draft law also specifies that if there is a natural person involved in the redemption, holding a substantial interest (i.e., more than 10% of the shares), the identity of the natural person shall be disclosed in the company’s annual corporate income tax return. Further to this, the draft law commentary specifies that the determination of the substantial shareholding test (more than 10% shareholding) is applied on the entire issued share capital of the company, not per share class.
Finally, please note that in limited circumstances, for example when a non-resident substantial interest holder realizes a gain from the disposal of a substantial participation in a Luxembourg resident company – such as a partial liquidation – within 6 months of the date of acquisition of the substantial participation can be still subject to Luxembourg capital gains taxation. Whether this will actually also result in Luxembourg taxation being due will also depend if a tax treaty is in force between Luxembourg and the country of residence of the shareholder, and on the wording of that treaty. In all cases, an independent tax adviser should be consulted.
2. Net wealth tax (NWT)
The draft law also proposes important changes to the minimum NWT which is also expected to take effect as of the 1st of January 2025.
Currently, Luxembourg applies two different systems to calculate minimum NWT which is based on the composition of a taxpayer’s balance sheet (i.e., when the balance sheet contains 90% or more financial assets). For tax payers with 90% or more financial assets, such as holding and finance companies, the minimum NTW amounts to EUR 4,815. For tax payers with less than 90% financial assets, the NWT generally ranges from EUR 535 to EUR 32,000. This system has been challenged before the Luxembourg courts and is deemed to be unconstitutional.
The government is therefore overhauling the system, and it is proposed that as of the 1st of January 2025, a single system based exclusively on the criterion of the taxpayer's balance sheet total will apply. Therefore, taxpayers whose total balance sheet:
- Does not exceed EUR 350,000 would be liable to a minimum NWT of EUR 535;
- If higher than EUR 350,000, but not exceeding EUR 2,000,000, would be liable to a minimum NWT of EUR 1,605; or
- Exceeding EUR 2,000,000 would be liable to a minimum NWT of EUR 4,815.
Based on the above, the maximum amount of NWT is reduced from EUR 32,000 to EUR 4,815. In addition, some taxpayers – such as holding and finance companies – that were subject to NWT of EUR 4,815 may potentially be subject to a lower NWT if their total balance sheet does not exceed EUR 2,000,000.
Next steps
Although the draft law may be subject to change as it moves through the legislative process, it is now a good time for clients to review their structure(s) with their tax advisers, including their future NWT liability. Clients should also consider reaching out to their Citco contact person for any relevant information, as part of their conversation with their tax adviser.