Luxembourg - Tax
Codification of the practice of redemption of classes of shares
On 24 May 2024, a draft law number 8388 (“Draft 8388”) was presented to the Luxembourg Parliament introducing, inter alia, very welcomed provisions concerning the tax treatment of the repurchase and cancellation of a class of shares, codifying and continuing a well-established practice in Luxembourg.
The provisions in Draft 8388 stipulate that the repurchase and cancellation of an entire class of shares is to be treated as a partial liquidation and therefore not subject to withholding tax.
For the treatment to apply, the following conditions must be met:
(i) the repurchase and cancelation should concern an entire class of shares;
(ii) the cancelation of the repurchased shares should take place within 6 months from the repurchase;
(iii) the share classes should be created at incorporation of the entity or on the occasion of a capital increase;
(iv) each class of shares should have different economic rights, such as preferred return, exclusive rights to profits for a certain period or profits entitlement linked to the performance of the underlying asset (i.e. tracking features), and
(v) the criteria for determination of the repurchase price are determined or determinable on the basis of the articles of association (or another document referred to within the articles of association) and reflect the fair market value of the class of shares at the time of the repurchase.
If a shareholder whose shares are being repurchased and cancelled is an individual who owns a substantial shareholding (10% or more) in the Luxembourg company, the Luxembourg company will have to disclose the information relevant for the identification of the individual shareholder in its tax return.
Once Draft 8388 is passed, the provisions will enter into force the day following the publication in the Luxembourg Official Journal.
Amendments to the minimum net worth tax rules
Draft 8388 further introduces amendments to the existing minimum net worth tax rules in Luxembourg. These changes follow from the decision of the Luxembourg Constitutional Court (see Q4 2023 for further details) ruling that the current provisions are unconstitutional.
Based on the proposed rules, the minimum net worth tax will be determined on the basis of a company’s total balance sheet without any additional criteriums, where a company with a balance sheet total of less than or equal to €350,000 will be subject to a minimum net worth tax of €535, a company with a balance sheet total of more than €350,000 but less than €2,000,000 will be subject to minimum net worth tax of €1,605 and a company with a balance sheet total of more than €2,000,000 will be subject to minimum net worth tax of €4,815.
The provisions of Draft 8388 in respect to the minimum net worth tax will apply as from the 2025 fiscal year.
Possibility to opt-out of the participation exemption
Draft 8388 introduces amendments to the Article 166 (1) of the Luxembourg Income Tax Act (“ITA”) and Article 115 (15) ITA, providing the possibility to opt out of the exemption for Luxembourg companies entitled to the (partial) participation exemption solely by application of the acquisition price criterion (€1,200,000 for dividends and liquidation proceeds and €6,000,000 for capital gains). This option is not available if the participation meets the 10% threshold requirement and does not meet the acquisition price criterion.
The option is to be exercised explicitly in a tax return for each fiscal year.
Pillar Two – Amendments to the Pillar 2 Law
On 12 June 2024, a draft law was presented before the Luxembourg Parliament incorporating clarifications in respect to the Pillar 2 Law, as explained in previous quarterly updates (Q3 2023 and Q4 2023). The main purpose of the draft law is to introduce certain elements not previously included in the Pillar 2 Law, derived from the OECD guidance published in February, July and December 2023.
The provisions relevant for the AIF industry are those concerning the possibility to consider the special purpose vehicle (SPV) held by the investment funds or real estate investment vehicles as an Excluded Entity under certain conditions (i.e. entities excluded from the scope of the Pillar 2 Law). According to the reading of the current law, the above-mentioned SPVs of the investment funds and real estate vehicles may classify as Excluded Entity if the investment or real estate funds are considered ultimate parent entity of the reporting group (UPE).
For an entity to be considered an UPE, such entity should, in principle, be subject to consolidation. Luxembourg investment funds are, in principle, not subject to consolidation obligations.
However, the draft law, in line with the OECD guidance, clarifies that the SPVs owned by the real estate investment vehicle or an investment fund, which is not an UPE only because it is not subject to consolidation obligations under the applicable accounting standards, may still be considered Excluded Entity if the other conditions are met. This is a very welcome clarification.
Other provisions provide clarifications in respect to the deemed consolidation test, country-by-country reporting safe harbour rules, deferred tax assets, divergent tax years situations, etc.