New Tax Bill

What the new Bill N°8388 provides

• New scale of rates for minimum net wealth tax 

• Repurchase of a class of shares clarified 

• Optionality of the participation-exemption

On 24 May 2024, Bill N°8388 (the “Bill”), which deals with some important tax matters, was released. 

Please find below the main takeaways of the Bill.

New scale of rates for minimum net wealth tax 

Following the decision of the Constitutional Court in a ruling dated 10 November 2023 considering the minimum net wealth tax (NWT) regime partly unconstitutional, the Bill proposes some amendments to the regime. 

Please refer to our previous article for more background in this respect. 

As a reminder, under the current regime, the minimum NWT due depends on the company’s balance sheet as follows:

• a flat minimum NWT of EUR 4,815 applies to entities with financial assets, receivables on related entities, transferable securities and cash at bank exceeding 90% of their total balance sheet and EUR 350,000; 
• a progressive minimum NWT ranging between EUR 535 and EUR 32,100 depending on the company’s total amount of balance sheet applies for all other companies which are subject to net wealth tax.

In order to be in line with the Constitutional Court ruling, the proposed new regime provides that there would only be a progressive minimum NWT applicable ranging between EUR 535 and EUR 4,815 depending on the company’s total amount of balance sheet as follows:

Repurchase of a class of shares clarified

The proposed amendment to Article 101, paragraph 1 of the Luxembourg income tax law (“LITL”) is intended to remove some ambiguity in the text and to provide clarification, based in particular on recent case law¹ and a framework for the partial liquidation of the company’s assets, as it may occur in practice. 

The proposed new wording of Article 101 LITL makes it clear that the repurchase and cancellation of a class of shares is treated as a partial liquidation and the income deriving therefrom as capital gains – provided the following conditions are met:

• The repurchase must result in a corresponding capital reduction within six months of said repurchase;
• The repurchase must be made for an entire class of shares;
• The classes of shares must be created at the time of the incorporation or capital increase of the company;
• Each class of shares must have different economic rights, defined in the articles of association of the company. According to the comments to the Bill, a distinct economic right is characterised by a specific right different from the rights of other classes of shares. This covers, in particular, classes of shares giving entitlement to preferential dividends, classes of shares carrying an exclusive right to profits for a specific or determinable period, or classes of shares whose respective financial rights are linked to the performance of one or more direct or indirect assets or activities of the company;
• The repurchase price of a class of shares must be determinable on the basis of criteria that are set in the articles of association of the company, or in any other document referred to in such articles of association, and make it possible to reflect the fair market value of the said class of shares at the time of the repurchase.  

Where the repurchase relates to a class of shares held directly by an individual who has a substantial interest in the Luxembourg resident company, the latter must provide, as part of its annual income tax return, information allowing the identification of such an individual.

Optionality of the participation-exemption

The Bill provides for an opting-out from the participation exemption regime on dividend income (Article 166 LITL). 

As a reminder, a qualifying Luxembourg resident taxpayer could be fully exempt from corporation taxes on dividend income if, among other things, it holds shares in its qualifying subsidiary which (i) either represent 10% at least of the subsidiary’s share capital or (ii) have been acquired for at least EUR 1.2 million euros.

The opting-out would be applicable only where the conditions of the participation-exemption are met based the minimum acquisition price of 1.2 million euros – which means that, if the taxpayer meets the minimum shareholding of 10%, the opting-out would not be applicable. 

Furthermore, the Bill also provides for an opting-out of the 50%-exemption based on Article 115.15a LITL.

This opting out is aligned with the participation exemption regime that exists in a number of other EU Member States and shall provide additional flexibility to the taxpayers to use their loss carry-forward, the deductibility of which is now limited in time pursuant to Article 114, paragraph 2 LITL.