May 2024
Luxembourg draft law n° 8388
We want to share our expert insights on the proposed changes in the Draft Law with you. Your understanding of these changes is crucial and we are here to provide you with the necessary information.
1. Minimum NWT
Currently, companies are subject to different minimum NWT amounts depending on the composition and size of their balance sheet. SOPARFIs, i.e. companies whose financial assets, amounts owed by affiliated undertakings, transferable securities and cash at bank (i.e., accounts 23, 41, 50 and 51 of the Luxembourg standard chart of accounts), represent more than 90% of the total of the balance sheet and exceed EUR 350,000, are only subject to a minimum NWT of EUR 4,815 while all other companies are subject to a varying minimum NWT, depending on the size of their balance sheet.
The Draft Law replaces the current regime by abolishing the different treatment between SOPARFIs and regular companies altogether and therefore impacts both types of companies. From FY 2025, all companies will be subject to the following amounts of minimum NWT:
- EUR 535 for companies with a total balance sheet under EUR 350,000;
- EUR 1,605 for companies with a total balance sheet between EUR 350,000 and EUR 2,000,000; and
- EUR 4,815 for companies with a total balance sheet over EUR 2,000,000.
2. Redemption of share classes/partial liquidation
The Draft Law also seeks to codify established jurisprudential findings and administrative practice regarding the tax treatment of redemptions and cancellations of classes of shares (so-called Partial Liquidations) in the Luxembourg income tax law (LITL).
Based on the Draft Law, the redemption followed by the cancellation of an entire class of shares by a corporate entity in Luxembourg will now be expressly recognised as a Partial Liquidation for Luxembourg income tax purposes and income generated under such transaction will qualify as capital gains (revenu d’aliénation). As a result, Partial Liquidations will fall outside the scope of Luxembourg withholding tax (WHT).
The Draft Law establishes a more transparent legal framework on the concept of Partial Liquidations. It specifies the criteria that must be met for the redemption of shares to be considered a Partial Liquidation and thus to be exempt from Luxembourg WHT.
Under the Draft Law, the redemption of the class of shares must cumulatively meet the following conditions:
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- The redemption must result in a corresponding reduction of the capital of the entity within a maximum period of 6 months after the redemption;
- The redemption must concern the entirety of a class of shares;
- The classes of shares must have been implemented at the moment of the constitution of the company or upon a later capital increase;
- Each class of shares must bear different economic rights, laid out in the company’s documents of incorporation, which must be distinct from those attached to the other classes (e.g., preferential dividends, shares granting an exclusive right to the profits of the entity for a determined period, shares tracking the profits arising from specific assets of the company); and
- The redemption price must be fixed based on criteria in the constitutive documents and reflect the fair market value of the class of shares.
The Draft Law does not distinguish between corporate entities or individuals as beneficiary of a Partial Liquidation and both can therefore benefit from the Partial Liquidation qualification. Individuals who hold directly a significant participation in the Luxembourg company (i.e., more than 10% of the total shares) must however be identified in the tax declarations applicable to the Luxembourg company.
In this context, the Draft Law clarifies that the 10% threshold applies to the total share capital, irrespective of the separate classes. Additionally, the Draft Law’s commentaries clarify that a change in the shareholders’ shareholding percentage as a result of a Partial Liquidation is not required for purposes of the qualification and related tax treatment.
Finally, it is worth noting that the general anti-abuse rule (GAAR) will continue to apply to the abovementioned circumstances.
3. Luxembourg PEX Regime waiver
Currently, Luxembourg tax law provides for a participation exemption regime (PEX Regime) whereby resident corporate taxpayers benefit from a full tax exemption on all dividend income and capital gains deriving from qualifying shareholdings (i.e., shareholdings of more than 10% of the subsidiary’s share capital or with an acquisition value of over EUR 1.2 Mio in respect of dividend income or EUR 6 Mio respectively in respect of capital gains).
The Draft Law now introduces the possibility of waiving the application of the PEX Regime for those taxpayers benefitting from this regime on the basis of the acquisition value of the subsidiary’s shares rather than 10% ownership in the subsidiary’s share capital. Such a possibility will have to be opted-in by the taxpayers on a yearly basis and, where relevant, separately for each applicable shareholding. Otherwise, the regular PEX Regime will continue to apply.
According to the Draft Law commentaries, such waiver may benefit taxpayers who may have an interest in using available tax losses carried forward since their deductibility is now limited in time.
Similarly, the Draft Law introduces the possibility for corporate entities to waive the application of the 50% exemption on dividend income as applicable to certain shareholdings that do not qualify for the PEX Regime. As the case for the regular PEX Regime, such waiver must also be opted-in on a yearly basis and for each individual shareholding.
4. Directors’ fees
As from 1st January 2025, declaration of the withholding tax on directors fees (i.e., form 510bis) will have to be filed online only.
We trust you find this helpful publication and welcome the opportunity to answer any questions or comments you may have. We will keep you updated on any additional tax measures.
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Ruben Minoli Associate |
