Luxembourg tax treatment of alphabet shares redemption: potential hidden dividend distribution subject to 15% Withholding Tax

Following on the Higher Administrative Court (“Cour Administrative”) case N°39193C originated on 23 November 2017, the Lower Administrative Court (“Tribunal Administratif”) confirmed the position in the case N°42432 on 27 January 2023 concerning the Luxembourg tax treatment of the redemption of alphabet shares (i.e. classes of shares not tracking specific investments).


For the present case, a Luxembourg company having its share capital divided between 10 classes of alphabet shares and a Cayman Islands’ fund as its sole shareholder, redeemed J class of shares to repay the amount of dividend distributions from almost three different subsidiaries (and therefore their underlying assets). The classes of shares of the Luxembourg company did not entail different political or economic rights, and they were created once the company was already incorporated. Additionally, only 5% of the nominal value of its share capital was redeemed to refund almost the full amount of cash of the company.

The Luxembourg company considered the repurchase and cancellation of class of shares as a partial liquidation, not subject to 15% Withholding Tax (“WHT”). However, the Luxembourg tax authorities concluded the transaction as legally abusive in the sense that the repurchase price did not correspond to the fair market value of the redeemed shares. Further, they concluded that the excessive part of repurchase price should be seen as a hidden dividend distribution subject to 15% WHT.


The taxpayer appealed the decision to the Tribunal Administratif, which has now followed the same position previously adopted by the Cour Administrative in 2017. The Tribunal Administratif concluded that transactions making use of a higher price than the fair market value of the redeemed shares could be seen as hidden dividend distributions. In those cases, any excessive amount at stake could be therefore subject to 15% WHT. The Tribunal Administratif remained silent as per abuse of law matters, however it should remain a relevant topic for future similar cases.

Finally, the Tribunal Administratif did not possess enough evidence to determine if the shares have been redeemed at fair market value, and the Luxembourg tax authorities will need to assess if any amount should be qualified as excessive and then subject to 15% WHT.


The redemption and immediate cancellation of alphabet shares has been a commonly and recently used practice in Luxembourg due to its flexibility to repatriate profits. The above-mentioned Tribunal Administratif case has provided more clarity about the tax treatment of such practice, and therefore caution should be taken in order not to conclude in a hidden dividend distribution requalification subject to 15% WHT. That is, the repurchase price of the redeemed classes of shares must be in line with fair market value (i.e. supporting documentation should be available for the fair market valuation of assets), an adequate number of shares should be redeemed, and classes of shares should bear different economic and political rights.