On 23 May 2024, Gilles Roth, the Minister of Finance of Luxembourg submitted draft bill No. 8388 (the Draft Law) to the Luxembourg Parliament. The Draft Law aims to (i) clarify the tax treatment applicable to classes of shares and (ii) simplify the minimal net wealth tax regime. Furthermore, the Draft Law includes (iii) a flexible opting-out mechanism for the participation exemption regime and (iv) the digitalization of specific tax filings.
1. New Rules for Buying Back Shares
Simplifying the Tax Treatment for Share Class Redemptions
The Draft Law aims to clarify the tax treatment of share class redemptions and the concept of “partial liquidation”, which is not subject to Luxembourg withholding tax.
According to the Draft Law the repurchase of an entire class of shares followed by its cancellation is deemed a partial liquidation and therefore exempt from Luxembourg withholding tax, if the following conditions are met:
- Share classes must be established during the incorporation process or during a subsequent share capital increase.
- The redemption is performed over an entire class of shares. The redemption is followed by its cancellation through a share capital reduction within six months after the redemption.
- Each class of shares has distinct economic rights, e.g. preferential dividend or profits derived from specific assets or activities over a predetermined period.
- The redemption price must be determined based on criteria set out in the articles of association, or in any other document referred to in the articles of association, and should reflect the fair market value of the class of shares at the time of its redemption.
The company will be required to submit a special declaration in its corporate income tax return if the redemption pertains to a class of shares held by an individual who holds a substantial interest (i.e. 10% or more) in the company. The commentary to the Draft Law reaffirms the continued application of the general anti-abuse rule.
2. Opt-Out Option for Tax Exemptions
Flexibility for Companies on Dividend Tax Breaks
Under the Luxembourg participation exemption (article 166 LITL), dividends and liquidation proceeds received by a Luxembourg entity are exempt from Luxembourg corporate income if:
- at the time that the income is made available, the parent entity holds at least 10% of the share capital of the participation and holds or commits itself to hold its participation for an uninterrupted period of at least 12 months; or
- the acquisition price of the participation is not less than EUR 1.2 million.
Furthermore, a 50% partial exemption is available for dividends received by a Luxembourg entity (i.e. article 115.15a LITL).
The Draft Law includes an opt-out of the two exemptions above, where the opt-out for the participation exemption (ex. article 166 LITL) only applies if the exemption would apply by virtue of the acquisition cost of EUR 1.2. million.
This amendment aims to reduce mismatches between Luxembourg’s tax rules with participation exemption regimes in other EU countries and would allow the use of carried forward tax losses which are limited in time.
In both scenarios, the option would need to be exercised annually starting and on a participation-by-participation basis.
3. Simplified Wealth Tax
Easier Minimum Net Wealth Tax System Based on Company Assets
The Constitutional Court determined on November 10, 2023, that the Luxembourg minimum NWT regime, which is primarily applicable to companies that possess financial assets, is against the principle of equality. The Draft Law proposes the implementation of a simplified and revised regime in which the minimum NWT is based on the taxpayer’s balance sheet. This is done by reducing the number of applicable backets and eliminating the condition regarding the composition of the balance sheet.
Starting in the fiscal year 2025, the NWT due will be as follows:
- EUR 535 for a total balance sheet of up to EUR 350,000;
- EUR 1,605 for a total balance sheet between EUR 350,000 and EUR 2,000,000; and
- EUR 4,815 for a total balance sheet exceeding EUR 2,000,000.
4. Mandatory Digital Tax Filings
Moving to Online Submissions for Specific Tax Returns
An additional measure of the Draft Law includes the mandatory electronic filing of specific tax declarations, such as withholding tax returns for director fees. Therefore, a Luxembourg entity that pays director fees should file the withholding tax return electronically with the tax authorities. These measures should entry into force per 1 January 2025.
5. Timing
The Draft Law will now follow the legislative process and will come into force once approved. We will share a further update as soon as the formal legislative proposal is published. Should you have any questions or require more information in the meantime, please do not hesitate to contact us.
