Luxembourg Draft Law proposes welcome tax clarifications and new provisions

On 23 May 2024, the Luxembourg Minister of Finance presented to Parliament a draft bill of law (the “Draft Law”), which, inter alia, (i) clarifies the tax treatment applicable to the redemption of classes of shares, (ii) simplifies the minimum net wealth tax regime, and (iii) introduces an opt-out mechanism in relation to the partial or total tax exemption of dividends. In addition to these major provisions aimed at increasing legal certainty and addressing the latest case law developments, the Draft Law also includes tax measures related to certain tax filings, which would now have to be made electronically (for instance, the withholding tax returns for directors’ fees), updated amortization rules for specific assets and a temporary tax credit for individuals.

Simplification of the minimum net wealth tax regime

Taking into consideration the decision of the Constitutional Court 185/23 on 10 November 2023 which ruled that some elements of the minimum net wealth tax (“NWT”) regime were unconstitutional, the Draft Law would simplify the regime by introducing, as of 1 January 2025, a single minimum NWT framework based exclusively on the taxpayer’s balance sheet.

The amount of minimum NWT due based solely on the total balance sheet of the taxpayer would be as follows:

  • EUR 535 where the total balance sheet is less than or equal to EUR 350,000;
  • EUR 1,605 where the total balance sheet is greater than EUR 350,000 and less than or equal to EUR 2,000,000;
  • EUR 4,815 where the total balance sheet is greater than EUR 2,000,000.

Practically speaking, for financial entities (which under the existing NWT regime correspond to entities having assets booked under accounts 23, 41, 50, and 51 of the Luxembourg standard chart of accounts (1) exceeding 90% of the total balance sheet and (2) exceeding EUR 350,000), the amount of NWT due would either be lowered or remain unchanged depending on their total balance sheet. For non-financial entities, the minimum NWT amount would be reduced to a maximum of EUR 4,815 compared to the maximum EUR 32,100 in the existing regime where the total balance sheet was greater than EUR 30,000,000.

Clarification of the partial liquidation regime

Article 101 of the Luxembourg income tax law (“LITL”) would be amended and completed to clarify the conditions allowing the benefit of the partial liquidation regime. This regime, which entitles taxpayers to treat the redemption of a full class of shares followed by a share capital reduction as a partial liquidation (thus not subject to Luxembourg withholding tax), would now apply subject to the following conditions:

  • The redemption is performed over an entire class of shares;
  • The classes of shares have been implemented upon incorporation or upon a share capital increase;
  • The classes of shares have distinct (such as preferential dividend, right to profit stemming from a specific asset, etc.) and defined (in the articles of association) economic rights;
  • The redemption of an entire class of shares can be determined based on pre-set criteria laid down in the articles of association (or in any document referred to therein) and reflects its fair market value.

The Draft Law also explicitly clarifies that the share capital reduction subsequent to the repurchase would have to occur within a short timeframe, in any case not exceeding six months.

In the specific case of an individual holding a significant participation (in a nutshell, 10% of the entire share capital at any time during the five years prior to the date of the transfer), the identity of the individual would have to be reported in the company’s annual tax return.

Finally, the commentary to the Draft Law recalls that the general anti-abuse provision would remain applicable in this context of partial liquidation transactions.

Opt-Out mechanism in relation to the partial or total tax exemption of dividends

Starting from tax year 2025, the Draft Law would allow taxpayers benefiting from (i) a dividend exemption under the Luxembourg participation exemption regime (article 166 LITL) or (ii) a 50% exemption under a domestic provision (article 115.15a LITL), to opt-out of the benefit of the available exemptions. In the specific case of the exemption deriving from the Luxembourg participation exemption regime, this opt-out provision would only be allowed if the exemption would apply by virtue of the acquisition cost condition (acquisition cost of at least EUR 1,200,000) and not by virtue of the shareholding ratio condition (shareholding of at least 10% of the share capital).

This opt-out mechanism would have to be exercised on both a yearly and a shareholding basis.

This provision aims to align the regime with other EU member states and provide an increased level of flexibility for taxpayers which, for instance, may wish to use their available losses carried forward (which can only be carried forward for 17 years).

The Draft Law now has to go through the legislative approval process. If adopted, it might still be subject to amendments and clarifications. Our Luxembourg tax team will closely monitor these developments and is available to answer any questions you may have.