On March 7th 2016, the Luxembourg Tax Authorities published a new circular regarding the taxation of capital gains stemming from the disposal of real rights relating to immovable property (Circular n°99ter/1bis, the “Circular”). The aim of the new Circular is to give guidance on the legal provisions in this matter (Art. 108bis Luxembourg income tax law - “LITL”), dealing with the taxation of the transfer of bare ownership (nue-propriété) or usufruct (usufruit). According to the Circular, any capital gain resulting from the disposal of solely the bare ownership or solely the usufruct gives rise to taxation, but only if the capital gain upon disposal of the full ownership would have been taxable.
The taxable capital gain is strictly limited to the gain linked to the increase in value of the bare ownership or usufruct. Any random gain (e.g. death of the tenant for life) or actuarial gain (i.e. value of the usufruct depending on the age of the tenant for life) will not be taken into consideration and the taxable capital gain will be adjusted accordingly.
The relevant provisions applicable to capital gains (Art. 99bis and Art. 99ter LITL) must be observed.
The applicable tax rate (full progressive or half progressive rate) will depend on whether the taxable operation falls within the speculative period between acquisition and disposal (i.e. within two years) or not (i.e. more than two years).
For this purpose, the Circular gives guidance on how to calculate the holding period of the immovable property:
- In case of acquisition of the full ownership with subsequent disposal of the usufruct, the holding period starts upon the acquisition of the full ownership;
- In case the bare ownership and the usufruct have been acquired at different dates but the disposal relates to the full ownership of the property, the holding period starts upon the first acquisition (i.e. bare ownership or usufruct);
- In case the usufruct or the bare ownership have been acquired separately and disposed of separately, the holding period starts with the acquisition of that relevant right.
Although the Circular exclusively gives examples relating to the transfer of real rights to immovable property, the same principles are applicable to other assets having a usufruct attached to them (e.g. share).