In a judgment dated 7 February 2024 (docket No. 46783), the Luxembourg Lower Administrative Court (Tribunal administratif) (the “Court”) handed down a decision concerning the application of the provisions of Article 157ter of the Luxembourg income tax law (“LITL”), allowing non-resident taxpayers to request, under certain conditions, to be treated as resident taxpayers for tax purposes.
As a reminder, non-resident taxpayers earning taxable income in Luxembourg are, in principle, only authorised to deduct their operating expenses or costs insofar as these expenses or costs have a direct economic link with the relevant Luxembourg income.
However, Article 157ter LITL provides that non-resident taxpayers may be taxed, on their income taxable in Luxembourg, at the (effective) rate that would be applicable to them if they were resident in Luxembourg if:
they are taxable in Luxembourg on at least 90% of their total income, both Luxembourg and foreign; or
the sum of their net income not subject to Luxembourg income tax is less than EUR 13.000.
In these circumstances, a notable consequence is that, contrary to what has previously been stated, non-resident taxpayers are entitled to deduct the expenses in the same conditions as those applying to resident taxpayers. Under this regime, married taxpayers are also taxed collectively unless they request to be taxed separately. In this case, it is sufficient that one of the two taxpayers meet the above conditions.
The main question submitted to the Court in the present case focused on the qualification of a capital gain realised on the disposal of a shareholding for the purposes of the verification of the conditions provided by this Article.
Facts of the case
At the moment of the filing of their tax return for the fiscal year 2019, the taxpayers expressed their intention to opt for the application of the provisions of Article 157ter LITL and for collective taxation.
The taxpayers' income consisted of (i) salary income from a profession exercised in Luxembourg, (ii) net investment income arising from dividend distributions made by Luxembourg resident companies and (ii) a capital gain arising from the disposal of shares held in these Luxembourg companies.
The tax office denied the benefits of Article 157ter on the grounds that the taxpayers were taxable in Luxembourg on less than 90% of their total worldwide income and that the annual net income not subject to Luxembourg income tax was greater than EUR 13.000.
Findings of the Court
The Court starts its reasoning by recalling that the determination of domestic income is based on Article 156 of the LITL and that all the income of a taxpayer which is not taxable in Luxembourg on the basis of this provision is considered as foreign income for the application of the regime of Article 157ter LITL.
The Court notes that, at the date of the disposal, the shareholdings represented less than 10% of the share capital of the relevant companies and had been held for a period of more than 6 months. These were therefore not disposals of shareholdings that could be considered as “significant” within the meaning of Article 100 LITL. It also notes that the taxpayers had not been resident in Luxembourg for more than 15 years and had become non-resident less than 5 years before the disposal of the shareholdings.
In these circumstances, the capital gain realised on the disposal of these shareholdings is not considered as domestic income within the meaning of Article 156 LITL.
According to the Court, if the source of the income is indeed Luxembourg as raised by the taxpayer, what is decisive for the verification of the 90% threshold is the domestic nature of the income according to Article 156 LITL.
This is not the case for the capital gain realised in this case on the disposal of the shareholdings, so that the taxpayers are not taxable in Luxembourg on at least 90% of their worldwide income.
As the capital gain on the disposal of the shareholdings is not taxable in Luxembourg as explained above, it must also be concluded that the income of the taxpayers not subject to Luxembourg income tax exceeds EUR 13.000, the amount of the capital gain having to be included in the calculation of this threshold.
Conclusion
The Court therefore concludes that the taxpayers are not entitled to claim the application of Article 157ter LITL insofar as they do not meet the conditions required by that provision to benefit from the regime of assimilation of non-resident taxpayers to resident taxpayers.
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