Fund Taxation Alert 2025-19

Under Luxembourg law, dividends distributed by companies established in Luxembourg to the State of Luxembourg and its public entities are exempt from the 15% withholding tax, whereas dividends distributed to public entities of other Member States of the European Union (“EU”) and the European Economic Area (“EEA”) are subject to that 15% withholding tax. The European Commission (“EU Commission”) regards this distinction as discriminatory toward public investments from other EU/EEA Member States and as contrary to the principle of the Free Movement of Capital, as laid down in Article 63 of the Treaty on the Functioning of the European Union (“TFEU”) and Article 40 of the EEA Agreement.

On 11 December 2025, the EU Commission decided to send a letter of formal notice to Luxembourg, granting the government two months to respond and address the allegedly discriminatory withholding tax regime. The EU Commission stated that the policy “results in a discrimination of public investments” and breaches the Free Movement of Capital. If Luxembourg fails to remedy the issue within the two‑month deadline, the EU Commission may issue a reasoned opinion as the next procedural step, which could ultimately lead to a referral to the European Union Court of Justice.

You can find the formal announcement by the EU Commission here.

We expect that the EU Commission’s position will improve access to dividend exemption benefits for non‑resident public entities and may give rise to refund claims.

Given the one‑year limitation period, we recommend promptly filing reclaims with the Luxembourg tax authorities.

KPMG Luxembourg has been filing withholding tax reclaims for non-Luxembourg public entities with the Luxembourg tax authorities for over 10 years, and our team of tax specialists can assist you with the process.

We will continue to monitor developments and provide updates as further information becomes available.