Summaries of the most significant Luxembourg draft laws in 2024

Draft law N°8388 dated 23 May 2024 

On 23 May 2024, the Government submitted a draft law which, among other things, (i) simplifies the minimum net wealth tax ("NWT"), (ii) clarifies the share class redemption and (iii) provides for the possibility of waiving the benefits of participation exemption regime in certain cases.

a) Simplification of the minimum NWT

Taking into account the decision of the Constitutional Court held on 10 November 2023 (n° 00185: for further details, please refer to our previous newsflash), the draft law proposes favourable measures to simplify the minimum NWT, which would no longer be based on the composition of the net assets of a taxpayer but would be exclusively determined based on its total balance sheet as described hereafter: 

• when the taxpayer’s balance sheet does not exceed EUR 350,000, the minimum NWT would be EUR 535; 
• when the taxpayer’s balance sheet is above EUR 350,000 and do not exceed EUR 2,000,000, the minimum NWT would be EUR 1,605 (instead of the current EUR 4,815); 
• when the taxpayer’s balance sheet exceeds EUR 2,000,000, the minimum NWT would be EUR 4,815 (which will be the new maximum, compared to the current maximum of EUR 32,100).

These amendments would be applicable as from 1^st January 2025.

b) Clarification of the tax treatment of redemption of share classes 

The draft law amends article 101 of the Luxembourg income tax law (“LITL “) by clarifying the conditions under which the redemption of a share class will be considered as partial liquidation for Luxembourg tax purposes.

The redemption of a share class followed by its timely cancellation will be deemed to be a partial liquidation not subject to a withholding tax if the following cumulative conditions are met:

• an entire class of shares is redeemed and consequently cancelled within a maximum period of six months as from the redemption; 
• the classes of shares are implemented at the time of the incorporation or at the time of a share capital increase; 
• each class of shares has economic rights specifically defined in the company's articles of association and which are distinct from each other; 
• the redemption price is determinable based on criteria set in the company's articles of association (or any other document referred therein) and reflects the estimated fair market value of that class at the time of its redemption. 

The Luxembourg general anti-abuse rule remains applicable to such redemption.

In the event of a redemption of shares held directly by an individual who holds a significant shareholding (more than 10 %) in the company, the company must provide information in its annual tax return to identify the individual.

From the date of publication of the adopted draft law, any redemption of shares must fulfil the aforementioned conditions.

c) Introduction of an option to opt-out from the tax exemption on income from qualifying participation 

The draft law provides the possibility for corporate taxpayers holding qualifying participations to opt-out for the tax exemption on dividends as follows: 

• Taxpayers could waive the benefit of the partial exemption (50%) on dividends pursuant to article 115, 15a of the LITL.
• Taxpayers could also opt-out of the exemption on dividends set out in article 166 of the LITL but only if the dividend income derived from the qualifying participation meets the EUR 1,2 million acquisition price.

Alongside the draft law, the Government proposed a draft Grand-Ducal regulation amending the Grand Ducal regulation of 21 December 2001 to allow taxpayers to opt-out from the exemption on capital gains on disposals of qualifying participations under certain conditions. Indeed, taxpayers will only be able to opt-out from the capital gains exemption if a qualifying participation meets the EUR 6 million acquisition price requirement. In addition, in the event of partial sale of a qualifying participation, the expenses and write downs (the so-called “recapture”) deducted in relation to a participation for which the taxpayer has requested a waiver will no longer be taken into account at the time of a subsequent disposal of this participation, up to the amount of the capital gain thus taxable following this waiver. The waiver option gives taxpayers the flexibility to (i) use their tax losses carried forward, especially those that are limited in time (this is the case for tax losses incurred since 1 January 2017, which can be carried forward for 17 years) and (ii) deal with potential issues resulting from the implementation of the Pillar Two Directive into Luxembourg law.

Each of the waivers described above would apply from the fiscal year 2025 and would need to be made individually for each fiscal year and for each qualifying participation.

Draft law N°8414 dated 17 July 2024

This draft law proposes favourable measures that will benefit both individuals and companies by reducing the tax burden on households and making Luxembourg more competitive.

a) Companies tax measures

• Reduction of the corporate income tax (“CIT”) rate: the CIT will be reduced from 17% to 16% as from fiscal year 2025, leading to an aggregate rate of 23.87% for companies registered in Luxembourg City.
• Subscription tax exemption for actively managed UCITS-ETFs (Undertakings for Collective Investment in Transferable Securities Exchange Traded Funds): this exemption would be applicable from the first day of the quarter following the entry into force of the draft law.
• Amendments related to the SPF (Société de gestion de patrimoine familial) tax regime: the draft law is proposing to (i) increase the minimum annual amount of subscription tax from EUR 100 to EUR 1,000, (ii) impose administrative fines of up to EUR 250,000 for breaches of the SPF law, which may be attached with an obligation to remedy the breaches and comply with the relevant legal provisions of the SPF law within six months of its notification, and (iii) withdraw the SPF's tax status if, after the previously mentioned six-month period, the SPF has not complied with the SPF law.

b) Individuals tax measures

The draft law proposes the following measures aimed at reducing household tax burden and attracting various categories of employees:

• Adjusting the individual income tax scale.
• Tax reliefs for individuals falling within class 1A and increase of the tax credits for single parents.
• Tax exemption for income received by the non-qualified minimum social wage. 
• Increase of the thresholds of the “participation premiums” that may be distributed to employees based on their employer's profit income: the exempted participation premiums will be increased from 25% to 30% of the employee’s annual remuneration, leading to the increase of the employer allocation rate from 5% to 7.5% of the company’s annual profit. 
• Modernizing and simplification of the tax regime for impatriate employees, by granting them an income tax exemption of 50% of their annual gross remuneration, capped at €400,000, instead of an exemption of their relocation expenses born by the employer.
• Introducing a new bonus for young employees under the age of 30, granting them partial tax exemption on the bonus received.
• Introducing a tax credit for overtime hours for cross-border  workers; this measure would apply from the fiscal year 2024.

Except if mentioned otherwise therein, the above amendments would be applicable as from 1 January 2025.

 Draft law N°8186A dated 18 July 2024

In view of the critical commentary that has been directed towards specific articles of the preliminary draft bill, which was submitted by the Government on 28 March 2023, amending the Luxembourg general tax law (Abgabenordnung) and introducing new provisions about transfer pricing and accounting, the Commission of Finances has divided the bill into two separate bills: Bill 8186A (the “First Bill”) and Bill 8186B (the “Second Bill”). The aim of this approach is to have ideally the First Bill still adopted in 2024, while the provisions of the Second Bill require further consideration and possibly amendments.

The main measures for the First Bill are as follows:

• Instalment payments for tax over a period of maximum six months at the taxpayer’s request, provided that the immediate tax payment would cause considerable difficulties to it and that the tax deferral does not jeopardise recovery.
• Reinforcement of the exchange of information between the direct tax authorities – Administration des contributions directes (ACD) and the Luxembourg financial regulator – Commission de Surveillance du Secteur Financier (CSSF), as well as between the direct tax authorities and the Insurance regulator – Commissariat aux Assurances (CAA).
• Enforcement of sanctions for breaches of the tax secrecy applied on contractors and subcontractors of the tax authorities, which currently applies only as regards agents of the Luxembourg tax authorities. 

These amendments would be applicable, depending on the tax measure, either as from 1^st January 2024 or as from the fiscal year 2024.

Next steps

Should you have any question, feel free to liaise with Gérard Neiens, Jean-Philippe Monmousseau or Michèle Aké.