Luxembourg Tax Alert 2023-15

Luxembourg's tax landscape faces potential recalibration following a notable decision (TA 45910) (PDF, 1.5MB) from the Lower Administrative Court (Tribunal administratif) on 18 April 2023. At the heart of the matter? The constitutionality of differential treatment in minimum net wealth tax for holding companies vis-à-vis other Luxembourg entities.

To set the stage, here's a primer on the prevailing tax regime: Companies in Luxembourg are subject to a minimum net wealth tax, depending on their balance sheet size, resulting in a tax liability ranging from EUR 535 to EUR 32,000. Exceptions exist for companies holding, predominantly financial assets, transferable securities, and specific receivables. These companies are subject to a minimum flat tax of EUR 4,815 provided they:

• Hold over 90% of their total assets in the aforementioned categories.

• Possess a total balance sheet value exceeding EUR 350,000.

Typically, holding companies meet these conditions and fall under this flat-rate category. 

The case that sparked this discussion involved a company eligible for the flat-rate of EUR 4,815 based on its assets' composition and total balance sheet value. However, if the balance sheet had been slightly different (i.e. <90% of financial assets), it would have been subject to EUR 1,605 of Minimum Net Wealth Tax. The company argues that penalizing companies vis-à-vis other companies on the sole basis of a differently structured balance sheet, would be contrary to purpose of Article 10bis, Paragraph 1 of the Constitution.

Challenging this unequal treatment, the company referred the matter to the Lower Administrative Court. The Court's findings? A clear distinction was made between similarly sized entities, solely based on their balance sheet composition. Further, no justification for this disparity was provided by the government's representative during the proceedings.

Given the current difference in treatment, questioning the law's alignment with the Luxembourg Constitution, especially with respect to the principles of equality in front of the law, the Lower Administrative Court opted for a referral to the Constitutional Court, the sole authority with capacity to rule over the constitutionality of laws.

The Constitutional Court will have to stop the debate and reach a decision. We anticipate a decision either late 2023 or early 2024. If the Court perceives the current tax treatment as unconstitutional, we expect a transformative shift in the tax regime, influencing the landscape for Luxembourg holding structures.