On 14 June 2023, the Luxembourg Lower Tribunal handed down a judgment regarding the tax treatment of the repurchase of a class of shares and the application of the general prohibition of abuse in tax law.
In the case at hand, the tax administration challenged the tax treatment of the repurchase of two classes of shares, held by non-resident shareholders, immediately followed by the cancellation of the said shares, on the grounds that the transaction was abusive within the meaning of § 6 of the Steueranpassungsgesetz (“StAnpG”). The tax administration argued that the repurchase price paid to these non-resident shareholders should be deemed a dividend distribution subject to 15% withholding tax.
The Luxembourg Lower Tribunal first held that the repurchase price paid by a company for the buy-back of its own shares should a priori be treated as capital gain income in the hands of the non-resident shareholders in so far as the shares were cancelled and the company’s capital reduced. This principle was however subject to several limitations, notably the general prohibition of abuse in tax law.
The Lower Tribunal recalled that in the event the price actually paid by the company to its shareholders in connection with the repurchase of its shareholding exceeds the fair market value of that shareholding and the price can only be explained by the existence of the shareholder relationship, the excess price may be qualified as a hidden distribution subject to 15% withholding tax.
In addition, the Lower Tribunal considered whether the repurchase should be found abusive, within the meaning of § 6 StAnpG. The Lower Tribunal highlighted the following features:
- The classes of shares were not created ab initio, but during the life of the company and following receipt of two dividend distributions;
- The classes of shares did not have different economic rights;
- The redemption and cancellation of a class of shares entitled each shareholder, on a pro rata basis, to an identical amount regardless of the shareholder or the concerned class of shares;
- The company had received dividend distributions shortly prior to the redemption of shares.
In light of these above features, the Lower Tribunal held that in the case at hand, the repurchase should be deemed abusive and considered, from an economic perspective, as a dividend distribution. The Lower Tribunal found that the repurchase had enabled the company to circumvent the withholding tax on dividends which should have applied. The company failed to present any non-tax motives which would have justified the transaction.
This judgment is a welcome addition to the recent line of case-law from the Luxembourg administrative courts confirming and refining the treatment of a repurchase of classes of shares under Luxembourg law.
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