Luxembourg Tax Alert 2023-15 Revision

A recent ruling (TA 45910) (PDF, 1.5MB) by Luxembourg’s Lower Administrative Court (Tribunal administratif) on April 18, 2023, has ignited discussions around the constitutionality of Luxembourg’s minimum net wealth tax, especially concerning its application to holding companies compared to other entities in Luxembourg.

Overview of the Current Tax System:

Here’s a brief overview of the existing tax framework: Luxembourgish companies are subject to a scaled minimum net wealth tax, with tax obligations ranging between EUR 535 and EUR 32,000, based on the size of their balance sheets. However, companies predominantly invested in financial assets, transferable securities, and certain receivables are subject to a different standard. They are liable for a flat minimum tax of EUR 4,815, provided they meet specific criteria, including holding over 90% of their assets in the mentioned categories and having a total balance sheet value over EUR 350,000. This structure typically applies to holding companies.

The Triggering Case:

The controversy stems from a case involving a company that qualified for the flat-rate tax of EUR 4,815 due to its asset composition and balance sheet size. The company’s contention was that being taxed differently based on its asset structure, compared to other companies with a different balance sheet composition, could violate Article 10bis, Paragraph 1 of the Luxembourg Constitution, which addresses equal treatment.

The company brought this issue to the Lower Administrative Court. The Court acknowledged a clear distinction in treatment between entities of similar size based purely on their balance sheet structure and found no adequate government justification for this disparity during the proceedings.

As a result, considering these differences in treatment and questioning the alignment with constitutional principles of equality, the Lower Administrative Court has referred the matter to the Constitutional Court, which is the only authority empowered to determine the constitutionality of laws.

Implications for Luxembourg’s Tax System:

The upcoming decision by the Constitutional Court, expected either in late 2023 or early 2024, will be crucial. Should the Court find the current tax treatment unconstitutional, a significant overhaul of the tax system could ensue, profoundly affecting Luxembourg’s landscape for holding company structures.