New Luxembourg tax bill aims to implement several income tax law changes including clarification of partial liquidation regime

The draft bill contains provisions concerning Luxembourg’s partial liquidation regime, which allows taxpayers to proceed to the redemption of a full class of shares followed by a share capital reduction without being subject to the 15% withholding tax applicable to dividend distribution provided conditions are met.

The regime is “very important” when structuring an investment especially to ensure tax efficient repatriation of proceeds to investors during the lifetime of an investment, according to tax expert Stephanie Raffini of Pinsent Masons. However, investors in Luxembourg companies have faced some uncertainty regarding the application of the regime by the Luxembourg tax authorities.

“This regime has been used in practice for a while and is subject to several case laws. Having this regime clearly stated in the Luxembourg Income Tax Law will be a great news for investors, as it will bring much-needed clarity and certainty,” said Raffini.

Currently, Luxembourg case law does not give clear guidelines on how the mechanism should be implemented. For example, it does not give guidelines on the timing to be considered between the redemption of the class of shares and the capital reduction. The bill proposes a six-month time limit between the two key events to qualify for the regime. It also clarifies the other conditions for benefiting from the regime.

To be eligible, redemption must be performed over an entire class of share; the classes of shares must have been implemented upon incorporation or share capital increase; each class of shares must have different economic right; and the redemption price should be determined in the bylaws and should reflect the estimated realised value of the shares.

A provision in the draft bill sets out the obligations for the Luxembourg company reducing its share capital by redemption of an entire class of share to identify the individual to which the class of shares is redeemed and who holds more than 10% of the shares in the company. This implicitly opens the applicability of the regime to individuals for which the application of the regime was controversial.

Another aim for the draft bill is to simplify the minimum net wealth tax (NWT) regime.

“The proposals mean the tax authority will only refer to the amount of the total balance sheet to determine the minimum NWT due by Luxembourg companies,” said Raffini.

The draft bill states that the minimum NWT due is €535 when the Luxembourg company’s total balance sheet is below or equal to €350,000. The amount goes up to €1,605 when the company’s total balance sheet is above €350,000 and below or equal to €2 million. The minimum NWT will be €4,815 when the company’s total balance sheet is above €2 million.

This could be applicable as early as fiscal year 2025 for the NWT payable based on the balance sheet as on the last day of 2024.

The proposed changes follow a decision by the constitutional court in November 2023. The court ruled that the Luxembourg minimum NWT regime is partly unconstitutional as it leads to a discriminatory situation among certain taxpayers in a similar situation. Under the current regime, the minimum of €4,815 is applicable for a financial holding company having fixed financial assets, intercompany loans, transferable securities and cash at bank exceed both 90% of its gross assets and €350,000. The court found that it was not constitutional as taxpayers having the same structure of balance sheet were not taxed the same way if the threshold of total balance sheet of €350,000 is exceeded.

Other changes introduced by the draft bill include a new obligation to electronically file withholding taxes returns for some revenues such as director fees, and allowing taxpayers to waive the application of certain exemptions upon request, such as the 50% exemption on dividend or interest distributed or paid by an eligible company and the exemption for dividend provided by the Luxembourg Participation Exemption regime based on an acquisition price of a shareholding participation of at least €1.2 million to be requested individually for each fiscal year and for each participation.