Luxembourg court emphasizes need to justify and document economic reasons to use alphabet shares

On 14 June 2023, the lower administrative court rendered a new decision (case n° 45759) once again dealing with the tax treatment applicable to the redemption by a Luxembourg company of so-called “alphabet shares”.

In the case at hand, although the redemption of classes of shares followed by their immediate cancellation had the characteristics of a partial liquidation, the court held that from an economic point of view, the transaction should be treated as a dividend distribution.

Accordingly, the court confirmed the position taken by the Luxembourg tax authorities, which recharacterized the transaction in a distribution of dividends on the grounds of abuse of law and consequently applied the 15% withholding tax on the full repurchase price.

Facts and background

On 22 April 2016, a company held by two individuals tax residents in Russia transferred its registered office from Cyprus to Luxembourg. Upon migration, the share capital of the new Luxembourg company (LuxCo) was composed of ordinary shares. LuxCo held an investment in a company tax resident in the Netherlands (DutchCo).

Between 2 November 2017 and 20 December 2017, LuxCo received several dividend distributions from DutchCo.

On 6 November 2017, LuxCo converted its ordinary shares into 20 classes of shares (Classes A to J and Classes AA to JJ). All classes had the same economic rights similar to the rights applicable for the initial ordinary shares. 

On 29 December 2017, LuxCo redeemed and immediately cancelled Classes J and JJ using the distributable reserves and entailing a reduction of LuxCo’s share capital. LuxCo considered that the transaction should qualify as a partial liquidation free of 15% withholding tax. 

The Luxembourg tax authorities recharacterized the transaction into a dividend distribution by LuxCo to its individual shareholders on the grounds of abuse of law and applied a 15% withholding tax on the full redemption price.

Decision of the lower administrative court

The court reminded that the legal forms are not conclusive to characterize a transaction from a tax perspective. What is relevant is the economic features of the transaction and the real intention behind it. 
In order determine whether the use of classes of shares and their redemption constituted an abuse of law, the lower court analyzed if the four criteria as laid down in paragraph 6 of the adaptation law were met. These are, as per the text applicable to the case in question (i) use of forms and concepts of private law, (ii) looking to circumvent or reduce taxes, (iii) use of an inappropriate path; and (iv) absence of valid non-tax reasons justifying the path chosen).
In the case at hand, the most important criterion debated were the ones related to the use of an inappropriate path and the absence of valid non-tax reasons justifying such path. 

Use of an inappropriate path

The Luxembourg tax authorities did not challenge the fact that the redemption of shares followed by their immediate cancellation may fall under the tax treatment of the partial liquidation. Hence, the lower administrative court confirmed that the transaction should be analyzed as a disposal by the shareholders of a portion of their participation in LuxCo. 

Contrary to the case law n°42432 dated 27 January 2023 where a re-characterization into dividend distribution was possible on the ground that the redemption price exceeded the fair market value of the redeemed shares, (please refer to our previous newsletter), in the case at hand, the requalification into dividend distribution was based on an economic analysis of the transaction.

To determine if LuxCo used an inappropriate path, the lower administrative court analyzed the specific facts of the case and noted the circumstances in which the classes of shares have been implemented and redeemed. The most relevant elements were the following:

  • The short timeframe (two months) between the conversion of the ordinary shares into classes of shares, the receipt of dividends by LuxCo from its subsidiary DutchCo and the redemption of the classes J and JJ shares;
  • The newly issued classes of shares had the same legal and economic rights than the initial ordinary shares issued upon migration to Luxembourg;
  • Each class entitled its holders in proportion to their interest in that class to an amount called available amount and which was defined as the total amount of LuxCo’s net profits (including profits carried forward); 
  • The redemption of a class of shares entitled the shareholders pro rata to their holding in that class, to an amount determined the same manner regardless of the class of shares redeemed and the selling shareholders concerned. In addition, their shareholding and their respective rights in the share capital of LuxCo have been equally and proportionally reduced following the redemption and cancellation of the J and JJ shares.

Based on the above, the lower administrative court concluded that the transaction did not reflect the intention of the shareholders to exit (totally or partially) from the share capital of LuxCo. 

The transaction could therefore not be analyzed as a sale affecting the substance of their shareholding in LuxCo given that they did not lose any right on the underlying income arising from their investment in LuxCo. The transaction should, however, be analyzed from an economic standpoint as a dividend distribution (with recourse to LuxCo’s distributable reserves) subject to 15% withholding tax in the absence of exemption or reduced rate.

Absence of valid non-tax reasons justifying such path

The court reminded that the tax authorities have the burden to prove the existence of an abuse of law. However, regarding the absence of non-tax reasons justifying the chosen path, the tax authorities only have to provide elements that make such absence plausible. Should this be the case, the burden of proof shifts to the taxpayer. 

In the present case, LuxCo’s arguments concerning the fact that it was entitled to choose the least taxed route and that it had not planned to reinvest its funds in accordance with its investment and financial policy were deemed insufficient. 

Hence, in the absence of other valid economic reasons, the lower administrative court concluded that this condition indicating abuse of law was also met.


This case law is interesting in the sense that the lower administrative court confirmed that a redemption of a class of shares followed by a its immediate cancellation should be analyzed as a partial liquidation meaning as a disposal by the shareholder of its participation. However, a requalification into dividend distribution is still possible if the redemption price exceeds the fair market value of the shares redeemed or (as in the present case) if the transaction cannot be justified economically (meaning the transaction corresponds to a dividend distribution from an economic standpoint). 

In addition, as noted by the lower administrative court, it is not enough for a taxpayer to state economic reasons (such as in the present case, a reorganization of its investment and financial policy). The latter must also be able to provide concrete proof of the existence of these economic reasons. This is why such reasons should be properly documented by the taxpayer notably in the relevant minutes of the board.