In a decision dated 21 March 2024 (no. 49678C), the Higher Administrative Court upheld a decision by the Director of the Luxembourg tax authorities (“LTA”), who in a specific case refused to apply the final withholding tax on savings income in the form of interest payments made in Luxembourg to beneficial owners who are individuals resident in the Grand Duchy of Luxembourg, as provided for in the amended law of 23 December 2005 (“Relibi Law”).
The case concerned the taxation of interest paid on bonds issued by a Luxembourg limited liability company offering consulting services (the “Company”).
In the context of a request for repayment by a former Luxembourg resident bondholder, the LTA gained access to the (draft) subscription agreement of the bonds issued by the Company leading the LTA to question the correct taxation of the bondholders. As per the terms of the subscription agreement the subscription of the bonds was restricted to individuals who are (i) shareholders of the Company and (ii) employees of a related entity. The bonds, which carried interest at a very attractive rate, were not transferable. The funds borrowed were used to make loans to entities in which the bondholders had a direct or indirect interest. According to the LTA, and contrary to the approach taken by bondholders, the terms of the bonds implied that the interest paid on the bonds should not benefit from the final withholding tax provided for by the Relibi Law amounting to 10% at that time but should be subject to taxation by way of assessment with application of the progressive tax scale.
The Higher Administrative Court ruled that no procedural irregularities had been committed by the LTA, since:
- the adversarial principle did not require the LTA to provide the bondholders with the draft subscription agreement prior to the issue of the tax assessments, considering that it is a document that the bondholders should have in their possession.
- the director of the LTA was competent to instruct the tax offices competent for the respective bondholders to proceed with their reassessment without violating the exclusive competence of taxation that belongs to the tax offices.
- the LTA did not breach tax secrecy because no prohibited disclosure took place.
Regarding the application of the Relibi Law, the Higher Administrative Court confirmed the refusal to apply the final withholding tax. By reference to the parliamentary work that led to the Relibi Law, the Higher Administrative Court pointed out that the Relibi Law does not apply to payments made by a private company to its shareholders that are not intended to remunerate and encourage savings. After recalling the principle of economic assessment, the Higher Administrative Court carried out an overall analysis of the situation. Taking into account the particular conditions of the bonds, the Higher Administrative Court adopted the same conclusion as to the non-application of the Relibi Law in the present case insofar as the payment of interest is to be qualified more as a payment made in consideration of the status of shareholder, or of employee, than as a payment of interest representing the remuneration paid in connection with savings.
Finally, to avoid double taxation, the Higher Administrative Court authorised the bondholders to set off the withholding tax paid against the taxation by way of assessment on the basis of Article 154 of the Luxembourg income tax law.
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