Luxembourg Tax Update: Vote of new tax measures and clarifications

These changes are applicable as from the tax year 2025 (with the exception of the CIB, only applicable for the year 2024).

Our previous publication about the Bill provided a more detailed explanations of these new measures. For your convenience, these have been included below.

For any questions, please contact your trusted advisor at Tiberghien Luxembourg or the authors of this publication.

• Simplification of the minimum net wealth tax regime:

On 10 November 2023, the Constitutional Court had concluded that the minimum net wealth tax regime applicable to companies mainly holding financial assets is contrary to the principle of equality. The Bill introduces a revised and simplified regime where the minimum tax merely depends on the total balance sheet of the taxpayer as follows:  

• Clarification of the tax treatment of share class redemptions:

The Bill clarifies the notion of ‘partial liquidation’, which is not subject to withholding tax and typically occurs in case of redemption of an entire shareholding that results in a capital reduction.

In line with Luxembourg case law considering that both the redemption and capital reduction need to occur within a sufficiently narrow timeframe, the Bill specifies a maximum delay of 6 months between the two operations.

The ‘partial liquidation’ regime expressly covers the redemption of a class of shares, followed by their cancellation, subject to the conditions that:

• The redemption covers the entirety of the class of shares;
• The classes of shares were set up at the time of the company’s incorporation or capital increase;
• Each class of shares features different economic rights, defined in the bylaws of the company.

The commentary to the draft Bill referred to examples such as shares giving right to preferred dividends or shares with financial rights linked to the performance of a specific asset or activity;

• The redemption price can be determined based on criteria set out in the bylaws of the company, or in a document referred to in the bylaws of the company, allowing to reflect the fair market value of the class of shares upon its redemption.

If the redemption relates to a class of shares held by an individual who has a significant interest in the company, the company is required to make a special declaration in its corporate income tax returns. A significant participation is deemed to exist if 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 at any time during the five years preceding the date of the transfer.

Finally, the commentary to the draft Bill emphasized that the general anti-abuse rule continues to apply.

• Opting-out of the participation exemption regime:

The Bill allows corporate taxpayers to opt out of two exemption regimes that concern dividends, namely:

• The Luxembourg participation exemption regime provided for by article 166 LITL on dividends received from qualifying participations where the participation held represents at least 10% of the share capital of the subsidiary or has an acquisition price of at least EUR 1,2 million. Due to the constraint imposed by the Parent-Subsidiary Directive, opting-out of the exemption is only allowed when the exemption is granted (only) by reason of the EUR 1,2 million threshold.
• The partial exemption regime provided for by article 115, 15a. LITL on dividends.

In both cases, the option needs to be exercised each year and on a participation per participation basis.

The introduction of this option is inspired by similar legislation in other EU Member States. It aims to allow more flexibility to taxpayers which may be willing to utilize their tax losses carried forward, in particular where tax losses realized since 1^st January 2017 can only be carried forward for 17 years.

• Reduction in corporate income tax rate:

As part of a different bill of law (8414 which has in the meantime also been adopted, Luxembourg will reduce its corporate income tax rate by 1% (from 17% to 16%). The aggregate rate of CIT, municipal business tax (MBT) in the city of Luxembourg (6.75%) and the contribution to the employment fund will reduce from the current 24.94% to 23.87%.