Luxembourg Tax Alert 2024-11

On 11 December three bills (bills 8414, 8388 and 8186A) were passed by the Luxembourg parliament, providing for new tax cuts (Tax Relief Package), amendments and clarifications of existing tax laws and modernization of the direct tax administrative procedure. A request to be exempted from the second vote was filed with the State Council. 

Whilst the following tax alert is focusing on corporate taxpayers and investment funds, please refer to our separate tax alert for an overview of the impacts for households and employees.

The Luxembourg corporate income tax (“CIT”) rate will be reduced by 1% as from tax year 2025, as described below:

Following the Constitutional Court’s ruling of November 2023 (please refer to our Luxembourg Tax Alert 2023-17 for more information), the MNWT regime has been simplified by aligning the MNWT for all types of taxpayers, irrespective of the proportion of financial assets held. The MNWT will be computed as from tax year 2025 as follows:

• EUR 535 if the total balance sheet does not exceed EUR 350,000 (no change compared to the current regime);
• EUR 1,605 if the total balance sheet is higher than EUR 350,000 and does not exceed EUR 2,000,000 (already applicable since the Constitutional Court’s decision, meaning a reduction of MNWT from EUR 4,815 to EUR 1,605 for taxpayers falling within this total balance sheet range and holding predominantly financial assets);
• EUR 4,815 if the total balance sheet is higher than EUR 2,000,000 (while the MNWT currently ranges between EUR 5,350 and EUR 32,100 for taxpayers falling within this total balance sheet range and holding predominantly non-financial assets).  

The amended law provides useful technical clarifications on the tax qualification of certain operations as partial liquidation, in the light of the latest case law.

It is clarified that the repurchase (or withdrawal) and cancellation of shares (including classes of shares) followed by the reduction of the share capital within a period of maximum 6 months qualifies as a partial liquidation.

The above tax treatment in the case of repurchase of classes of shares is subject to the following cumulative conditions:

• An entire class of shares is repurchased or is withdrawn;
• The classes of shares are implemented upon incorporation or increase of share capital;
• Each class of shares has economic rights, which are defined in the by-laws and are distinct from the other classes;
• The redemption or withdrawal price are determinable based on criteria provided in the by-laws (or any other document referred to in the by-laws) and allowing to reflect the fair value of these classes of shares upon repurchase or withdrawal.

If the repurchased or withdrawn class of shares is directly held by an individual holding a participation of more than 10% in the Luxembourg entity, the latter must disclose the identity of such individual in its annual tax return. 

This will enter into force on the day after publication of the law in the Official Gazette.

As from tax year 2025, taxpayers can opt to waive the exemption applicable to income arising from certain participations:

• Dividends and liquidation proceeds benefitting from an exemption under the Luxembourg participation exemption regime (article 166 LITL), where such exemption only results from an acquisition cost of at least EUR 1.2 million (i.e. not from a participation of at least 10%);
• Income (e.g. dividends) qualifying for the 50% exemption available under article 115, 15a LITL.

A draft Grand-Ducal decree, expected to be passed soon, provides for the same waiver option with respect to the exemption applying to capital gains, where such exemption only results from an acquisition cost of at least EUR 6 million.

In all the situations described above, the waiver must be requested individually for each tax year and for each participation.

This aims at aligning with the regime applicable in other EU member states and facilitating the use of tax losses carried forward (whose deductibility is subject to a 17-year time limit since 2017).

The technical amendment provides for the application of the existing so-called "equity escape clause" in the context of a single entity group.

Under specific conditions, taxpayers qualifying as single entity group will be able, upon request, to fully deduct their exceeding borrowing costs of a given year. For instance, this could apply to securitization companies having issued notes (almost) exclusively to third parties.

This will be applicable to accounting years starting as from 1 January 2024.

As from 1 January 2025, the mandatory electronic filing procedure will be extended to the withholding tax returns on directors’ fees, salaries and pensions to be filed by the Luxembourg debtors of the related income (including, amongst others, employers).

Actively managed UCITS ETFs (Undertakings for Collective Investment in Transferable Securities Exchange Traded Funds) will be exempt from subscription tax.

To fall within the scope of the new exemption, the definition is quite broad but provides a limitation of the benefits to those UCITS ETFs that are listed.

The amended law also clarifies that in case there are several units or compartments within the listed UCITS fund, the exemption only applies to the unit or compartment qualifying as ETF.

The exemption will become applicable on the first day of the trimester which follows the date of entry into effect of the law, expected to be 1 January 2025.

The law governing the SPF is modernized with the overall goal of reducing the abusive use of this vehicle.         

This includes the increase of the minimum annual amount of subscription tax from EUR 100 to EUR 1,000, as well as the possibility for the Luxembourg indirect tax authorities to apply increased penalties on SPFs where certain requirements are not met, which could lead in certain situations to the withdrawal of the tax status for SPFs.

The amendments will become applicable as from the day after it has been published in the Official Gazette.

The measures adopted on 11 December (bill 8186A) cover the direct tax recovery process (including possible instalment plans for taxpayers under conditions), the possibility for the direct tax administration to outsource certain tasks (including IT tasks) subject to respect of tax secrecy, and the exchange of information between the direct tax administration and (i) the Commission de Surveillance du Secteur Financier (CSSF) as well as (ii) the Commissariat aux Assurances (CAA).

The newly adopted bill 8186A results from the split of the initial Bill 8186 into two bills, bill 8186A and bill 8186B, allowing to isolate the more straight-forward measures (bill 8186A) from the more debated measures requiring further work and amendments (pending bill 8186B).

For further details on bill 8186, please refer to our Luxembourg Tax Alert 2023-03.  

Most of the tax cuts and technical clarifications adopted on 11 December will be effective as from 2025 and will impact many corporate taxpayers. Our tax experts remain at your disposal to guide you through those new measures and assess to which extent they are applicable to your group.