ATOZ Insights - November 2024

2024 Luxembourg ongoing initiatives in tax matters – State of play

OUR INSIGHTS AT A GLANCE

• Over the past few months, several draft laws have been presented by the Luxembourg Government which include (direct) tax changes and are still pending before Parliament.
• On 24 May 2024, a draft law was presented to Parliament which, with effect as from tax year 2025, mainly amends the minimum net wealth tax rules, as well as the participation exemption regime, and clarifies the tax treatment of partial liquidations. One of the additional changes introduced by the draft law is an amendment of the rules on mandatory electronic filing.
• On 12 June 2024, a draft law was presented to Parliament to amend the Luxembourg law of 22 December 2023 on the minimum effective taxation of multinational enterprise groups and large national groups implementing the EU Directive of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union.
• On 17 July 2024, a draft law implementing a new tax package called the "Relief Package. Unity. Future. For Everyone" was presented to Parliament.
• On 18 July 2024, a draft law was released to split the draft law aiming at simplifying and modernising the rules governing the direct tax procedure in Luxembourg dated 28 March 2023 into two different draft laws (draft law 8186A and draft law 8186B). It was felt appropriate to split the initial draft law into two new pieces of legislation in order to take into account the large amount of criticism (see for example the comments of the chamber of commerce dated 9 June 2023) raised with regard to some of the provisions of the initial draft law and also take into account some of the comments and formal objections made by the Council of State.
• On 9 October 2024, the Luxembourg government presented its 2025 budget draft law (n°8444) which includes two additional new tax measures, the main one amending the law dated 22 May 2024 introducing various measures to revive the housing market.
• We describe hereafter the state of play of these tax initiatives and analyse the expected time line for their adoption.

In our May 2024 Insights, we provided an analysis of the law dated 22 May 2024 introducing various tax measures to revive the housing market. Since then, several additional draft laws, which include (direct) tax changes, have been presented over the past months by the Luxembourg Government. They are currently still pending before Parliament even though they are planned to become applicable in the coming months.

The most recent proposal is the 2025 budget law which followed the July draft law introducing a new package of tax measures for both companies and individuals to strengthen the attractiveness of Luxembourg, including a 1% cut of the corporate income tax rate.

Other draft laws introduce welcome changes of tax rules already in force (e.g. the possibility to waive the benefit of the participation exemption for dividends and capital gains under certain circumstances) or clarifications of tax rules already in force (e.g. on the tax treatment of share class redemptions or on how to apply the Pillar Two rules).

Finally, more than 1.5 years after its release, the draft law aiming to modernise the Luxembourg tax procedure is moving again after a long standstill, and some of its provisions are planned to enter into force retroactively as from 2024.

We describe hereafter the state of play of these tax initiatives and analyse the expected time line for their adoption.

Draft law amending the minimum NWT rules and the participation exemption regime and clarifying the tax treatment of share class redemptions

On 24 May 2024, a draft law was presented to Parliament which, with effect as from tax year 2025, mainly amends the minimum net wealth tax ("NWT") rules, as well as the participation exemption regime, and clarifies the tax treatment of partial liquidations. One of the additional changes introduced by the draft law is an amendment of the rules on mandatory electronic filing.

Amendment of the minimum NWT rules to make them compliant with the Constitution: based on the rules currently in force, the minimum NWT due by Luxembourg resident companies is determined based on the types of assets held by the company and the size of its balance sheet. Following a recent ruling of the Court of Constitution according to which the existing minimum NWT regime for companies holding predominantly financial assets is unconstitutional, the draft law removes the distinction currently made based on the types of assets held by the company and provides that, as from tax year 2025, the minimum NWT will amount to EUR 535, EUR 1,605, or EUR 4,815, depending on the size of the total balance sheet of the company, regardless of the types of assets held.

Clarification of the tax treatment of share class redemptions: the draft law further clarifies the cumulative conditions to be met for a share class redemption or withdrawal to be treated as a partial liquidation which is not subject to Luxembourg withholding tax. The main conditions clarified by the draft law are the following: the redemption or withdrawal has to relate to an entire class of shares; each class of shares must have distinct economic rights; the corresponding capital reduction has to take place within a period of time not exceeding six months, the share classes must have been created either upon the incorporation of the company or upon a subsequent increase of the share capital.

New possibility to waive the benefits of the participation exemption regime: currently, the full exemption of dividends and capital gains based on the Luxembourg participation exemption regime (Article 166 of the Luxembourg income tax law, "LITL", for dividends and Grand-Ducal Regulation of 21 December 2001 for capital gains) applies automatically as soon as the respective requirements are met. The draft law introduces the possibility for a corporate taxpayer to waive the benefits of the Luxembourg participation exemption. However, this option will only be available where the conditions for the participation exemption are met solely by virtue of the threshold of the acquisition price of the shareholding, i.e. if the Luxembourg taxpayer holds less than 10% in the share capital of the subsidiary, but the acquisition price of the shareholding is equal to at least an amount of EUR 1.2 million for dividends or 6 million for capital gains. When the conditions for the exemption are met on the basis of a shareholding of at least 10%, it will not be possible to exercise this waiver. This limitation is due to the constraints arising from the EU Parent-Subsidiary Directive. The draft law further proposes an amendment to Article 115, number 15a of the LITL to give corporate taxpayers the option of waiving the 50% exemption on income from shareholdings. The option to waive the benefits of Article 115, number 15a LITL and Article 166 LITL will have to be exercised individually for each tax year and for each shareholding.

Amendments to the rules on mandatory electronic filing: with effect as from 1 January 2025, the draft law extends the scope of mandatory electronic filing of tax returns to withholding tax returns on directors' fees and withholding tax forms on remuneration and enhanced tax credits. On 4 July 2024, the Luxembourg tax authorities clarified the new obligations set out in the draft law concerning, in particular, mandatory electronic filing, as from 1 January 2025, for withholding tax returns on directors' fees and withholding tax forms on remuneration and enhanced tax credits. The tax authorities specified in particular which persons are concerned by the mandatory electronic filings. This includes notably companies paying director's fees subject to withholding tax to their board members, as well as employers paying salaries to their employees. To read the details provided by the tax authorities, please click here.

On 8 October 2024, the Council of State (which has the task of examining the conformity of the draft law with the Luxembourg Constitution) provided its opinion on the draft law and formulated a formal objection on the article of the draft law that modifies Article 115, number 15a of the LITL to give corporate entities the option of waiving the 50% exemption of dividend income. According to the Council of State, the provision lacked legal certainty because the proposed provision did not define the concept of shareholding while the commentary explains that "the concept of shareholding (...) is to be considered as a whole, and not in isolation with regard to the securities of which it is composed".

On 12 November, the draft law and the Council of State's comments were discussed within the Luxembourg Parliament with the aim of presenting and adopting the required amendments. On that basis, the draft law was modified on 12 November 2024 by the insertion of the following clarification in the provision: "For the purposes of the waiver, all the shares held by the taxpayer in the company are to be taken into account".

On this basis, in its opinion dated 26 November 2024, the Council of State withdrew its formal opposition. Thus, as of today, there is no reason to believe that this draft law cannot be passed and become law before year-end. In addition, since the draft law includes specific provisions dealing with its entry into force (most of the measures entering into force as from tax year 2025), the timing of the finalisation of the legislative procedure is of little relevance. The only provision that will enter into force immediately the day after the publication of the law in the Official Journal is the amendment of Article 101 of the LITL related to the tax treatment of share class redemptions.

While further clarifications will be necessary, e.g. on the impact of the proposed waiver of the participation exemption on the so-called "recapture rule", the changes introduced by the draft law are generally welcomed. They provide more legal certainty and additional flexibility in the current competitive business environment. To find out more about the measures of the tax package, please click here and read our ATOZ Alert: "Welcome modifications of the minimum NWT and the participation exemption for dividends and clarifications on the partial liquidation in case of the redemption of classes of shares".

Draft law amending the Pillar Two Law to incorporate OECD Guidance

On 12 June 2024, a draft law was presented to Parliament to amend the Luxembourg law of 22 December 2023 on the minimum effective taxation of multinational enterprise ("MNE") groups and large national groups (the "Pillar Two Law").

The draft law incorporates clarifications, interpretations and additional technical provisions resulting from the three sets of administrative guidance published by the OECD/ G20 Inclusive Framework on BEPS in 2023. The proposed amendments to the Pillar Two Law deal with a multitude of aspects of the minimum taxation rules, including clarifications on the scope of application of the rules (excluded entities, turnover definition, etc.) and on how to deal with several issues in practice, such as mismatches in accounting and tax periods within the group, as well as on specific issues related to the computation of the income and loss, the top-up tax and the domestic top-up tax (e.g. which functional currency to apply where constituent entities of the group establish their accounts based on different currencies).

Several clarifications are also included on the transitional rules, including the country-by-country reporting safe harbour, and the rules on how deferred tax assets and liabilities are taken into account in the effective tax rate computation in the transition year, as well as on administrative/filing obligations. To find out the main clarifications for Luxembourg investment funds, please read our ATOZ Alert: "Pillar Two Law to be amended to incorporate OECD Guidance".

On 31 October 2024, the Luxembourg government introduced new amendments to the draft law. The new amendments aim at implementing part of the June 2024 OECD guidance, notably in respect of (1) the notion of "owner" when a flow-through entity is held directly by another flow-through entity, (2) the allocation of income/ loss of a flow-through entity to owners that are not group entities and whose ownership interests in the flow-through entity are owned directly or indirectly through a tax transparent structure and (3) the treatment of securitisation vehicles.

On 8 October 2024, the Council of State of Luxembourg, however, already approved the June version of the draft law. The Council will now have to issue a new opinion on the amendments proposed by the government. This should delay the approval of the draft law by the Parliament but, as at today, there is no reason to believe that this draft law cannot be passed before year-end.

In this regard, it should be kept in mind that the amendments to be introduced are mainly intended to introduce clarifying provisions so as to guide taxpayers on how to interpret and apply the rules of the Pillar Two Law which are already in force and do not, as such, introduce changes to the rules in place. In addition, the administrative guidance which the draft law proposes to incorporate into the Pillar Two Law was already approved and published by the OECD Inclusive Framework prior to the entry into force of the Pillar Two Law. The commentaries to the Pillar Two Law state in this respect that this law "takes into consideration the guidance that has been released at OECD level". This is why the entry into force of the provisions of the draft law are aligned to those of the Pillar Two Law, i.e. the new provisions would apply to tax years starting on or after 31 December 2023.

Still, it can be expected that the Pillar Two Law will have to be amended again in the future, notably to incorporate additional amendments since the OECD guidance is still being developed.

Draft law introducing tax package to strengthen Luxembourg's attractiveness

On 17 July 2024, Finance Minister Roth presented a new tax package, the "Relief Package. Unity. Future. For Everyone" and a draft law implementing this new tax package was presented to Parliament on the same day.

The draft law introduces targeted tax measures for both businesses and individuals.

The main tax measures concerning businesses include:

• a 1% cut of the corporate income tax rate, and
• a subscription tax exemption for actively managed exchange traded funds.

The main tax measures concerning individuals include:

• an improved employee profit-share regime,
• a more favourable impatriate regime,
• a new bonus for young employees, and
• a new tax credit for cross-border workers.

These measures aim at strengthening Luxembourg's attractiveness, so that Luxembourg remains a suitable jurisdiction for workers, companies and investment funds.

On 22 October, the Council of State issued its opinion on the draft law and raised a minor formal opposition meaning that the draft law requires to be amended in order to be passed. On 15 November, the draft law and the Council of State's comments were discussed within the Luxembourg Parliament with the aim of presenting and adopting required amendments. On this occasion, the government has also introduced an additional amendment. The purpose of this further amendment is to renew, for the 2024 tax year, the existing tax bonus for taking on unemployed workers and to extend it for a further two years, until the end of 2026.

On 26 November 2024, the Council of State confirmed that the draft law, as amended, is not anymore subject to a formal opposition. Given the importance of bringing this bill into force before the end of the year, there is no reason to believe that this draft law will not be passed and become law before year-end.

To find out more about the measures of the tax package, please click here and read our ATOZ Alert: "New tax package to strengthen Luxembourg's attractiveness".

Draft law modernising the Luxembourg tax procedure

On 28 March 2023, a draft law was released in order to simplify and modernise the rules governing the direct tax procedure in Luxembourg. We briefly presented the amendments to be introduced in our ATOZ Alert "Upcoming amendments to the Luxembourg procedure in tax matters"

and commented them further in our August 2023 ATOZ Insights article "Direct tax procedure: Commentary on upcoming amendments". While some of the amendments to be introduced are positive as they will bring more certainty for taxpayers (e.g. implementation of a procedure to obtain an advance bilateral/multilateral agreement on transfer pricing and clarification of the transfer pricing documentation to be provided to the Luxembourg tax authorities as part of the cooperation duty of taxpayers), it seems that the main purpose of the changes to be introduced is to simplify the direct tax procedure for the tax authorities (e.g via the introduction of an obligation for the taxpayer to file an appeal before the Administrative Tribunal within a certain deadline in case of silence of the Director further to the filing of a tax claim and of a 10% threshold to limit the right to file a tax claim in case of automatic taxation – taxation d'office) rather than to increase the tax certainty for taxpayers. In addition, many of the provisions of this draft law raise questions.

On 18 July 2024, the draft law was split into two separate draft laws (draft law 8186A and draft law 8186B). While the two draft laws do not introduce any new measures, it was felt appropriate to split the initial draft law into two new pieces of legislation in order to take into account the large amount of criticism (see for example the comments of the chamber of commerce dated 9 June 2023) raised with regard to some of the provisions of the initial draft law and also take into account some of the comments and formal objections made by the Council of State (see the opinion of the Council of State dated 11 July 2023). The first draft law (i.e. draft law 8186A) now contains the least criticised provisions that are essential to the process of modernising the direct tax procedure, while the second draft law (i.e. draft law 8186B) includes the provisions which require more in-depth analysis and thus more time. In other words, the aim of the transformation of the initial draft law is to make sure that the least criticised, but still very important, provisions can be adopted quickly (the aim being to submit draft law 8186A to the first constitutional vote of the Parliament still before the end of 2024) and that more time can be granted for further analysing and potentially improving the other provisions now included in draft law 8186B.

Draft law 8186A contains notably provisions related to:

• the digitalisation of the tax procedure,
• the administrative cooperation,
• the tax recovery procedure.

On 22 October, the Council of State issued its opinion on the draft law and did not raise any formal opposition meaning that the draft law could be presented to Parliament to be passed. On 12 November, the draft law and the Council of State's comments were discussed within the Luxembourg Parliament. It is therefore expected that the draft law 8186A can be adopted as soon as possible, as planned.

2025 budget draft law

On 9 October 2024, the Luxembourg government presented its 2025 budget draft law (n°8444) Here is a brief description of these two tax measures: which only includes two new tax measures. This is not surprising taking into consideration the various tax measures proposed by the Luxembourg government since the beginning of 2024.

Here is a brief description of these two tax measures:

• CO2 tax credit

The draft law proposes to increase the CO2 tax credit by €24 to reach the amount of €192 as from 1 January 2025. Various legislative amendments are proposed to take account of the new amount of the so-called CO2 tax credit for self-employed persons, employees and pensioners, which is scheduled to apply from tax year 2025.

• Amendment to the Law dated 22 May 2024 introducing various measures to revive the housing market

The law dated 22 May 2024 provides that the "Bëllegen Akt" tax credit for the purchase of real estate intended for residential use is increased from €30,000 to €40,000 per individual (or €80,000 for a couple) for property acquisitions documented by notarial deeds between 1 January 2024 and 31 December 2024.

The 2025 draft budget law proposes to add that in the event of a purchase of real estate intended for residential use documented by a notarial deed executed between 1 October 2024 and 30 June 2025, a 50% reduction of the taxable basis used for computation of the registration tax and transcription duties will be granted. The request for such reduction must be included in the notarial deed of acquisition.

The Law dated 22 May 2024 also provides for a new "Bëllegen Akt" tax credit for investment in rental housing. The amount of this tax credit is set at €20,000 per individual acquirer and applies only to individuals. It is intended solely for sales in future state of completion (Ventes en état future d'achèvement - VEFA) documented by notarial deeds executed between 1 January 2024 and 31 December 2024. This tax credit can be used for several acquisitions during 2024 but the cumulative amount cannot exceed €20,000 per individual (or €40,000 for a couple).

The 2025 draft budget law now proposes to add that in the event of an investment in existing or new rental housing between 1 October 2024 and 30 June 2025, a 50% reduction of the taxable basis used for the computation of the registration tax and transcription duties will be granted. The request for such reduction must be included in the notarial deed of acquisition.

These measures are in addition to the ones that had already been introduced as per the "Bëllegen Akt" which was part of the temporary 'housing' package of measures in force until 31 December 2024. After 31 December 2024, the "Bëllegen Akt" drops to €30,000 per person for buyers of a primary residence, and the "Bëllegen Akt" for investors ends. Therefore, for a bit more than one month, property buyers can take advantage of a reduced rate of registration fees and a tax credit on registration fees ("Bëllegen Akt").

According to the draft law, since the new tax measures will be introduced in the course of the year, purchasers will be allowed to request retroactive application of the law if they go to the relevant tax office to sign a declaration of acceptance setting out the legal conditions.

• Other announcements

In the draft law, the Government announces that 2025 will see the continued implementation of the tax measures set out in the 2023-2028 coalition agreement. In particular, work on provisions concerning individual taxation will be continued in order to determine a tax model based on a single tax class. In addition, the monitoring of the implementation of Pillar 2 (effective minimum taxation) will still require the active involvement of the Ministry of Finance teams. In this context, the draft budget law announces a substantial increase in the staff of the Administration des Contributions Directes ("ACD") as part of its modernisation programme.

At European level, the Ministry of Finance teams will continue to monitor the numerous proposals on direct and indirect tax matters that are currently negotiated (including 'Unshell', 'BEFIT', 'HOT', energy taxation, etc.), as well as the work at the OECD on Pillar 1 (reallocation of certain profits of multinational companies to the jurisdictions where their consumers are located).

Finally, as part of the implementation of Luxembourg's National Integrated Energy and Climate Plan ("PNEC"), the carbon price will continue to be increased annually by €5 per tonne of CO2 in order to reach the level of €50 per tonne by 2027. Revenue generated by the CO2 tax will continue to be earmarked for measures protecting the climate and promoting the energy transition, and also for social compensation measures for low-income households. One of the measures aimed at mitigating the potential impact of the CO2 tax on people with low or average income is the CO2 tax credit.

At the time of writing of this article, the Council of State had not yet commented/opined on the draft budget law so it remains to be confirmed when the legislative procedure will be finalised. However, the draft budget law shall, in principle, become law before year-end.

Conclusion

Following its recent election at the end of 2023, the Luxembourg government has quickly put its words into action. On 31 May 2024, a law introducing various measures to revive the construction sector in Luxembourg was published. A few days earlier, the Luxembourg government released a draft law modifying the minimum NWT and the participation exemption for dividends and clarifying the tax treatment applicable to the redemption of classes of shares and in July, new tax measures were proposed to strengthen Luxembourg's attractiveness. Given the already numerous ongoing tax initiatives, as expected, the 2025 budget draft law presented to Parliament on 9 October 2024 only introduces a limited number of tax measures, including mainly an increase of the maximum amount of CO2 tax credit, as well as additional measures to revive the housing market. In parallel, the Luxembourg government is working to make sure the OECD guidance on Pillar 2 is duly implemented in Luxembourg, at the same time clarifying a few legal uncertainties introduced by this law. By doing so, the Luxembourg government is working actively on implementing the tax measures announced in its coalition agreement.

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