Key Tax Measures Unveiled

5 mn

On 23 May 2024, bill of law 8388 (Bill) was submitted to the Luxembourg Parliament, introducing several measures that complement existing domestic tax rules: net wealth tax simplification, participation exemption opt-out, share repurchases codification and electronic tax return for directors’ fees.

On 23 May 2024, bill of law 8388 (Bill) was submitted to the Luxembourg Parliament, introducing several measures that complement existing domestic tax rules. In the following sections, we detail the main measures: simplification of the minimum net wealth tax following the Constitutional Court’s 2023 decision, codification of the share repurchase mechanism, possibility to opt out of the participation exemption regime, and electronic filing of tax returns for directors’ fees.

1. Simplification of minimum net wealth tax1

Background

Luxembourg companies are generally subject to an annual net wealth tax (NWT) at the rate of 0.5% (0.05% for the upper tranche of net worth exceeding EUR 500 million) applied to their net assets as determined for NWT purposes.

Net worth for the purposes of the NWT calculation is referred to as the unit value (valeur unitaire) of the company as determined on 1 January of each year. The unit value is calculated as the difference between (i) assets estimated at their fair market value (valeur estimée de réalisation) and (ii) liabilities towards third parties. Third-party liabilities relating to exempt assets (e.g. participations qualifying for the participation exemption) are not deductible when computing the unit value for the purposes of the NWT calculation.

Luxembourg companies are also generally subject to a minimum NWT.

Currently, the minimum NWT is set at EUR 4,815 for Luxembourg companies whose financial assets, receivables from affiliated undertakings, transferable securities and cash deposits cumulatively exceed (i) 90% of their total balance sheet and (ii) EUR 350,000. All other companies are subject to a minimum NWT on the basis of their total balance sheet according to a progressive tax scale varying from EUR 535 to EUR 32,100.

Proposed modification

The Bill modifies the minimum NWT so that it will now be determined solely on the basis of the company’s total balance sheet:

Minimum NWT

EUR 535

EUR 1,605

EUR 4,815

Total balance sheet

≤ EUR 350,000

> EUR 350,000 and ≤ EUR 2,000,000

> EUR 2,000,000

This modification follows the decision of the Constitutional Court on 10 November 2023 (No 00185) which found the legal basis of the minimum NWT to be unconstitutional (see our newsflash).

2. Codification of share repurchase mechanism2

The Bill clarifies that, in line with Luxembourg case law, liquidation proceeds are to be assimilated to capital gains when there is a (partial) liquidation with no withholding tax in Luxembourg.

Income derived from the repurchase of a participation, including a class of shares, followed by a reduction of share capital within 6 months qualifies as liquidation proceeds (free of Luxembourg withholding tax), subject to the abuse of law principle. Further, for a repurchase of a class of shares, the following conditions have to be met simultaneously:

  1. An entire class of shares is repurchased.
  2. The share classes are created at incorporation of the entity or on a capital increase.
  3. Each class of shares has different economic rights, such as preferential dividends, exclusive rights to profits for a specified or determinable period or financial rights linked to the performance of one or more underlying assets. These rights must be defined in the entity’s articles of association.
  4. The repurchase price of a class of shares is determinable based on criteria set out in the entity’s articles of association (or in another document referred to in the articles) and reflects the fair market value of that class of shares at the time of repurchase.

On repurchase of a class of shares, if an individual owns a substantial participation in the entity, the entity must include information identifying that individual in its annual tax return.

To identify a substantial shareholding, the 10% holding ratio is determined based on participation in the entity (and not in a class of shares).

The fact that a shareholder in the repurchased share class is also a shareholder in any of the remaining share classes should not affect the mechanism described above.

3. Opt-out from the participation exemption regime3

Background

Dividend and liquidation proceeds: dividends and liquidation proceeds received by a Luxembourg entity are exempt from corporate taxes under the Luxembourg participation exemption regime if certain conditions are met. These conditions are that:

  • at the time the income is made available, the parent entity holds or commits itself to hold their participation in an eligible entity for an uninterrupted period of at least 12 months; and
  • during that entire period, either:
    • the level of their participation does not fall below the threshold of 10% of the eligible entity’s share capital; or
    • the acquisition price of the participation is not less than EUR 1.2 million.

Furthermore, a 50% partial exemption is also available for dividends. This exemption has broadly the same entity eligibility requirements as the dividend participation exemption but does not include any holding period, 10% threshold, or minimum acquisition price requirements.

On repurchase of a class of shares, if an individual owns a substantial participation in the entity, the entity must include information identifying that individual in its annual tax return.

To identify a substantial shareholding, the 10% holding ratio is determined based on participation in the entity (and not in a class of shares).

The fact that a shareholder in the repurchased share class is also a shareholder in any of the remaining share classes should not affect the mechanism described above.

New opt-out option

The Bill introduces an option for taxpayers to decline the benefit of the participation exemption where it applies solely by virtue of the acquisition price criterion (EUR 1.2 million for dividends and liquidation proceeds or EUR 6 million for capital gains). Taxpayers will also be able to opt out of the 50% partial exemption regime for dividends.

This option must be exercised separately for each tax year and for each participation. Non-exercise of the opt-out will result in the default exemption continuing to apply.

4. Electronic tax return for directors’ fees4

Background

For Luxembourg tax purposes, the payer of directors’ fees is the relevant Luxembourg entity and, as such, the entity is personally liable to declare and pay the tax it has withheld from the fees. Accordingly, the Luxembourg entity must file a withholding tax return (form 510bis) no later than 8 days after payment of the directors’ fees and pay the 20% withholding tax to the Luxembourg tax authorities.

New electronic filing

The Bill proposes that the withholding tax return be submitted in electronic format to the tax authorities by the Luxembourg entity paying the directors’ fees.

Next steps

The Bill will now follow the normal legislative process and the law will come into force on the day following its publication in the Luxembourg Official Journal.

However, the provisions relating to electronic returns will apply from 1 January 2025 and the minimum NWT provisions will apply from the 2025 tax year.

How we can help

The Tax partners and your usual contacts at Arendt & Medernach are at your disposal to advise on how the Bill is likely to impact your activities.

1. Legal reference: §8(2) of the amended law of 16 October 1934 on the net wealth tax (Vermögensteuergesetz).

2. Legal reference: Article 101 of the amended Income Tax Law of 4 December 1967 (ITL).

3. Legal reference: Article 115(15)(a) and Article 166 ITL and Grand Ducal regulation of 21 December 2001.

4. Legal reference: Article 152, Title 2 ITL.