Administrative Court, 23 November 2017

Decision of the Luxembourg Administrative Court, No. 39193C, 23 November 2017

In 2008, a Luxembourg resident company redeemed its own shares, representing the balance of the shares owned by a shareholder. In 2012, the share capital of the company was reduced to cancel the redeemed shares. The Luxembourg tax authorities considered that the redemption by the company of the participation of a shareholder not followed by the immediate cancellation of such shares should not be treated as a partial liquidation of the company within the meaning of Article 101 of the Luxembourg Income Tax Law (“LITL”) and should be subject to the dividend withholding tax at a rate of 15%.

Applying an economic approach, the Luxembourg Administrative Court held that the net proceeds received by a shareholder upon the redemption by the company of all or part of his/her shares without a corresponding cancellation of the shares so redeemed should not qualify as income from capital (i.e. dividend) falling under the scope of Article 97 (1) LITL, but as income from the realisation of a participation (i.e. capital gain) falling under the scope of Article 100 LITL or Article 99bis LITL. Thus, no dividend withholding tax is applicable to such redemption, except where the redemption price is not justified by sound economic reasons. In such latter case, any excessive amount paid to a shareholder may still be treated as a hidden distribution pursuant to Article 164(3) LITL and thus be subject to withholding tax.

Elvinger Hoss Prussen welcomes the decision of the Luxembourg Administrative Court which clarifies the tax treatment of the redemption of shares not followed by the immediate cancellation of such shares.