On 23 May 2024, the government submitted draft law No. 8388 to the Luxembourg Parliament (the “Draft Law”) clarifying the Luxembourg tax treatment applicable to classes of shares, simplifying the minimum net wealth tax regime, and introducing an opt-out mechanism for dividends tax exemption. Other tax measures include the digitalization of certain tax filings, notably withholding tax returns on directors’ fees, and the introduction of a temporary tax credit for individuals.
Classes of shares : legislative clarification
The Draft Law clarifies that the repurchase of an entire class of shares followed by its cancellation is considered as a partial liquidation, thus not subject to Luxembourg withholding tax, when the following conditions are met:
- Implementation: The classes of shares must be set up at incorporation or during a subsequent share capital increase.
- Characteristics: Each class of shares must bear different economic rights which shall be defined in the by-laws. As per the comments to the Draft Law, can be considered as different economic rights, entitlement to a preferential dividend, rights to profits derived over a pre-determined period, from a specific asset, or activity.
- Repurchase and cancellation: An entire class of shares shall be repurchased and cancelled which should result in a share capital reduction within 6 months of the repurchase date. As per the comments to the Draft Law, it is not required that the repurchase results in a change in shareholders’ ownership percentage.
- Repurchase price: The by-laws of the issuer, or any document referred to in the by-laws, must provide for the formula to compute the repurchase price of a class of shares which should reflect its fair market value at the time of the repurchase.
- Reporting: The repurchase from an individual holding a significant participation must be reported in the company’s tax returns. A participation is deemed significant notably when the shareholder, alone or together with his spouse or partner and minor children, has directly or indirectly held more than 10% of the share capital (assessed on the entire share capital) at any time during the 5 years prior to the date of the transfer.
Naturally, the comments to the Draft Law confirm that the general anti-abuse rule remains applicable in this context.
Dividends and capital gains exemption : annual opt-out per participation held
The Draft Law introduces the possibility for corporate taxpayers holding participations eligible for an exemption of dividend income to opt-out annually from such exemption:
- The opt out mechanism for the dividend’s exemption applies to the partial (50%) exemption under article 115, 15a of Luxembourg income tax law (“LITL”) and to the full exemption provided by the participation exemption regime enshrined under article 166 LITL. A limitation to the opt-out mechanism applies in case the exemption relies on the participation exemption regime. While under the latter regime the dividends exemption is available, amongst other conditions, where the participation in the share capital either has an acquisition price of at least EUR 1.2 million or represents at least 10% of the share capital, the opt-out is only available where the exemption relies on meeting the EUR 1.2 million acquisition price threshold.
- Taxpayers can choose annually for which participation they want to opt-out from the exemption. The option applies per participation held and not per share.
- If the taxpayer does not opt-out, the relevant exemption will apply if the conditions are met.
- The opt-out would be available as from fiscal year 2025.
At the same time, the government proposed amendments to the existing Grand Ducal Decree extending the participation exemption regime to capital gains on eligible participations. The amendments would introduce the above described opt-out mechanism for capital gains eligible for an exemption under the participation exemption regime as well. As for the dividends exemption, the opt-out mechanism from the capital gains exemption is only available when the exemption relies on the minimum acquisition price which amounts to EUR 6 million for capital gains.
The introduction of such option is inspired by similar legislations in other EU countries and in practice, it would be useful notably for taxpayers having tax losses carried forward that are not otherwise used especially in a context where tax losses realized since 1st January 2017 can only be carried forward for 17 years.
Simplification of the minimum net wealth tax regime
The Draft Law amends the minimum net wealth tax regime (“MNWT”) to remove the condition pertaining to the composition of the balance sheet and simplify the regime by reducing the number of applicable backets.
This amendment takes place in the context of the Constitutional Court decision on 10 November 2023 (see our previous newsflash on the decision and its consequences) ruling the MNWT for holding companies partially unconstitutional.
As from fiscal year 2025, the MNWT due shall be as follows:
- EUR 535 for a total balance sheet up to EUR 350,000;
- EUR 1,605 when the total balance sheet is between EUR 350,000 and EUR 2,000,000;
- EUR 4,815 when the total balance sheet exceeds EUR 2,000,000.
The new MNWT regime is aligned with the Constitutional Court decision and goes further by decreasing the MNWT liability of companies which were previously subject to the MNWT based on their total balance sheet as where the latter exceeded EUR 2,000,000 the MNWT ranged from EUR 5,350 to EUR 32,100.
Other rules governing the MNWT such as the possibility to reduce the MNWT with previous year’s corporate income tax liability and the EUR 32,100 cap to tax groups’ MNWT liability remain unchanged.
Other tax measures
- Digitalisation of the certain tax filings: The Draft Law extends, as from 1st January 2025, the electronic filing obligation to: (i) the withholding tax return for directors’ fees, (ii) the withholding tax return to be submitted by employers, temporary employment agencies, the pension organism, the organisms paying the pecuniary benefits listed in article 95a LITL as well as the annuities listed in article 96a LITL, and the organism paying unemployment benefits and (iii) the return for withholding tax levied under the flat tax regime for household employees.
- Update to the accelerated amortization rules: This special amortization applies to assets acquired by a Luxembourg enterprise to protect the environment or reduce energy consumption. The Draft Law adds the Ministry in charge of the Commissioner for Maritime Affairs as a competent authority to deliver the conformity certificate required to benefit from the special amortization.
- A temporary tax credit for individuals (“credit d’impôts barème”) is introduced for 2024 to compensate for the end of the “crédit d’impôt conjoncture”.
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