In its decision dated 25 March 2026 (Case no. 45846a), the Luxembourg Administrative Tribunal ruled that a repayment of share premium to shareholders, in the absence of a corresponding formal reduction of share capital, does not fall within the scope of the exemption provided for under Article 97(3)(b) of the Luxembourg Income Tax Law (LITL). Instead, such a payment must be treated as investment income under Article 97(1)(1) LITL and may therefore be subject to dividend withholding tax at a rate of 15%.
Background
The case concerned a Luxembourg public limited company that had built up a share premium reserve upon its initial public offering and subsequent share capital increases. Over time, this reserve had been reduced to absorb accounting losses. Following a return to profitability, the company reallocated part of its accounting profits to the share premium account, ensuring the total did not exceed the historical shareholder contributions. Subsequently, the company distributed part of its share premium to the shareholders.
On 20 December 2018, the company filed an advance tax agreement request seeking confirmation that the contemplated distribution would qualify as a tax-neutral return of contributions. The request was rejected by the tax authorities on 20 March 2019. The company nevertheless proceeded with the distribution at its ordinary general meeting of 10 April 2019, and on 24 July 2019 the tax office issued a withholding tax assessment applying the 15% rate.
The case was initially declared inadmissible by the Administrative Tribunal in February 2023, but this decision was overturned by the Luxembourg Administrative Court of Appeal on 3 October 2023, which remitted the case to the Administrative Tribunal for a decision on the merits.
Administrative Tribunal's analysis
- Article 97(3)(b) LITL does not extend to standalone share premium repayments
In a nutshell, Article 97(3)(b) LITL provides that allocations made in the context of a share capital reduction are not treated as investment income and are therefore not subject to withholding tax, provided that they are justified by sound economic reasons. The Administrative Tribunal held that this exemption applies exclusively to distributions carried out as part of a formal share capital reduction in accordance with applicable company law rules.
The Administrative Tribunal noted that while the LITL does not define "share capital reduction", "share capital" or "share premium", the legislative intent limits the exemption to formal share capital reductions governed by corporate law.
In this respect, Luxembourg company law draws a clear distinction between share capital and share premium, the latter corresponding to the excess of the issuance price over the nominal value of the shares allocated to the contributor. While the share premium arises in connection with the issuance of shares, it does not affect their nominal value and therefore does not form part of the share capital. Similarly, the Luxembourg chart of accounts distinguishes between share capital (account 10) and share premium (account 11), despite both being components of equity.
Accordingly, the Administrative Tribunal concluded that a standalone repayment of share premium, in the absence of a corresponding reduction of share capital, falls outside the scope of the exemption.
- Qualification as investment income under Article 97(1)(1) LITL
Having denied the application of the exemption, the Administrative Tribunal concluded that such repayments should be classified as investment income pursuant to Article 97(1)(1) LITL, which encompasses "dividends, profit shares and other proceeds" derived from participations.
The Administrative Tribunal emphasized that the term "proceeds" is intentionally broad, capturing any distribution to shareholders from the company's net assets unless a specific statutory exemption applies. A repayment of share premium constitutes such a distribution and therefore falls within this residual category of taxable investment income.
- No reliance on German tax concepts and economic principles
Finally, the Administrative Tribunal rejected the taxpayer's reliance on both German tax concepts and economic arguments.
In particular, it held that, in the absence of any legal basis, the taxpayer failed to demonstrate why the German Bundesfinanzhof decisions or German doctrine should be considered applicable in Luxembourg or directly transposable to its tax system.
It further dismissed arguments based on economic substance or "economic common sense", stressing that such considerations may only play a subsidiary role in interpretation: while they may help avoid manifestly absurd outcomes, they cannot override a clear statutory rule.
Practical implications
In practice, the decision is highly relevant for Luxembourg companies considering share premium repayments. Going forward, such distributions may trigger withholding tax if they are not executed as part of a formal share capital reduction, regardless of the economic origin of the funds or whether the distribution is justified by sound economic reasons.
While the judgment provides useful guidance on the interpretation of Article 97(3)(b) LITL, it remains subject to further review by the higher courts, and its broader impact will depend on the outcome of any appeal and the extent to which its reasoning is confirmed.
Authors: Michiel Boeren, Jeronimo Chavarria, Maxime Grosjean, Julian Wehlen (Tiberghien Luxembourg)
