New bill of law: welcome amendments and clarifications on tax matters

On 24 May 2024, the Luxembourg parliament published a draft law (the "Draft Law") which foresees notably:

i. the codification of the rules on partial liquidations in response to recent case law on the subject;

ii. amendments to the minimum net wealth tax ("MNWT") following ruling 185/23 from the Constitutional Court dated 10 November 2023; and

iii. the possibility to apply the participation exemption regime on an optional basis.

The different points of the Draft Law are further explained below.

Welcome codification of the partial liquidation rules regarding classes of shares

The partial liquidation mechanism applied to classes of shares has always relied on the longstanding administrative practice and interpretation of Article 101 of the Luxembourg income tax law ("ITL"). The determination of whether proceeds fall within the scope of Article 101 ITL is of major relevance given that this qualification allows to fall outside of the scope of the Luxembourg withholding tax rules depicted under Article 97 ITL.

The application of said partial liquidation mechanism to classes of shares has however led to tax litigation which has given rise to recent case law on the subject¹. The purpose of the Draft Law in this respect is to provide clarity on the subject by codifying the partial liquidation mechanism regarding classes of shares in light of said recent case law.

In this respect the Draft Law clarifies that when a participation held in a corporate entity, including a class of shares or corporate units, is subject to a repurchase or withdrawal, resulting in a corresponding reduction of the corporate entity' share capital within a short period not exceeding six months from said repurchase or withdrawal, the net assets of that corporate entity are considered to be divided for the fraction corresponding to said participation or said class of shares or corporate units.

In this context, the Draft Law clarifies that the repurchase or withdrawal of a class of shares or corporate units must meet the following conditions simultaneously:

• the repurchase or withdrawal concerns the entirety of a class of shares or corporate units;
• the classes of shares or corporate units are established at the time of the establishment or increase of share capital of the corporate entity;
• each class of shares or corporate units has economic rights, defined in the bylaws of the entity, distinct from those of other classes of shares or corporate units; and
• the repurchase or withdrawal price of a class of shares or corporate units is determined based on criteria set forth in the bylaws of the entity, or in any other document referred to in those bylaws, and allowing to reflect the estimated realization value of said class of shares or corporate units at the time of repurchase or withdrawal.

Where the repurchase or withdrawal concerns a class of shares or corporate units held directly by an individual holding a participation representing 10% or more of the share capital of the corporate entity, the latter provides, as part of its annual declaration for income tax, the information allowing the identification of such individual(s).A repurchase or withdrawal complying with the aforementioned conditions qualifies as a partial liquidation and the income resulting therefrom qualifies as a capital gain which are not subject to withholding tax in Luxembourg. This being said, the Draft Law highlights, in line with the recent case law on the subject, that the abuse of law concept remains applicable in case of such partial liquidation.

This legislative clarification will become applicable as from the day after the publication of the Bill of Law in the Journal officiel.

Amendments to MNWT

Following the aforementioned ruling from the Constitutional Court, it was held that the current MNWT was unconstitutional given that it provides a different treatment in MNWT (i.e. flat rate of EUR 4,815 vs progressive rate of EUR 1,605) depending on the company's balance sheet composition, thereby giving rise to a discriminatory treatment of companies being in a comparable situation (i.e. companies having a total balance sheet ranging between EUR 350,000 and EUR 2,000,000).

Indeed, under the current MNWT, a company having a total balance sheet ranging between EUR 350,000 and EUR 2,000,000 is either subject to (i) the flat rate of EUR 4,815 if its financial assets, receivables on related entities, transferable securities and cash at bank exceed 90% of its total balance sheet (the "Threshold") or (ii) to the progressive rate of EUR 1,605 if it does not meet that Threshold. The Draft Law aims to amend the MNWT to avoid having such discriminatory treatment by relying simply on the total balance sheet and by deleting the reference to the balance sheet composition (i.e. the Threshold).

As a result, the Draft Law proposes to insert the following new MNWT brackets:

• EUR 535 if the total balance sheet is less than or equal to EUR 350,000;
• EUR 1,605 if the total balance sheet is greater than EUR 350,000 and less than or equal to EUR 2,000,000;
• EUR 4,815 if the total balance sheet is greater than EUR 2,000,000.

This new provision applies only as from fiscal year 2025.

Optionality of the participation exemption

Under the current participation exemption regime, dividends and liquidation proceeds derived by a Luxembourg qualifying parent entity (the "Parent Entity") from its participation in a qualifying subsidiary (the "Qualifying Subsidiary") are exempt from corporate income tax and municipal business tax if, at the time of the distribution of said income, the Parent Entity owns or commits to own, a direct a participation of at least 10% or with an acquisition price of at least EUR 1.2m in the share capital of the Qualifying Subsidiary for an uninterrupted period of at least 12 months.

The Draft Law aims to grant Parent Entities the possibility to waive the application of this exemption in case where the Parent Entity owns a direct participation with an acquisition price of at least EUR 1.2m in the share capital of the Qualifying Subsidiary and the other conditions are met. The possibility to waive the application of this exemption does hence not apply in case where the Parent entity owns a direct participation representing at least 10% of the share capital of the Qualifying Subsidiary.

The waiver of this exemption would have to be exercised for each fiscal year and for each Qualifying Subsidiary separately. If the waiver is not exercised, the exemption applies.

The purpose of this amendment is to align the Luxembourg participation exemption regime with the one of other EU Member States and to allow Parent Entities to use their tax losses to offset the taxable dividends or liquidation proceeds. It is anticipated that the provision of the Règlement Grand-Ducal providing an exemption on capital gain where the acquisition price is of at least EUR 6m in the Qualifying Subsidiary will also be symmetrically amended. However, such amendment would require a different legislative process.

For completeness and with the same purpose, the Draft Law foresees also the possibility to waive the exemption of 50% of the dividends paid by certain companies as provided under Article 115, 15a ITL.

The provisions will apply from fiscal year 2025.

Next steps and how can we help?

The Draft Law will now follow the usual legislative process through Parliament and may be subject to further amendments for which we will keep you informed.

The tax law partners at Ashurst are at your disposal to further assess and advise on how the Draft Law is likely to impact your operations in Luxembourg.