Luxembourg's Tax Law update: Essential information on share class mechanisms from draft bill N°8388

As per the new amendment brought by draft bill n°8388, the tax treatment of share class redemption/buyback gets a clear legal basis, in an effort to consolidate and codify a long-standing market practice.

The amended Article 101 of Luxembourg income tax law (LITL) will now provide that when a participation, including a class of shares, is subject to a buyback, resulting in a corresponding share capital reduction within a short period not exceeding six months from the said buyback, it will be treated as a partial liquidation, therefore not subject to (dividend) withholding tax.

In this context, the redemption of a class of shares is now legally characterized when the following conditions are simultaneously met:

  1. The buyback or withdrawal involves the entirety of a class of shares;
  2. The classes of shares are established at the time of the entity’s formation or during a capital increase;
  3. Each class of shares has economic rights, defined in the entity’s bylaws, distinct from those of other classes of shares or social parts;
  4. The redemption price of a class of shares is determinable based on criteria set out in the entity’s bylaws or any other document referred to in these bylaws, allowing the fair market and arm’s length value (valeur estimée de réalisation) of the said class of shares at the time of the redemption/buyback to be reflected.

These distinct economic rights must be specific compared to the rights of other classes of shares and would cover the following special arrangements:

  • Preferential dividends,
  • Exclusive rights to profits for a determined or determinable period,
  • Respective financial rights are linked to the performance of one or more direct or indirect assets or activities of the entity.

Furthermore, it is emphasized that the proposed clarifications regarding Article 101 LITL do not impact the determination of the notion of significant participation (“participation importante”). Thus, according to the provisions of Article 100 LITL, the 10 percent threshold continues to be assessed in relation to the participation as a whole, and not in relation to each class of shares.

With respect to tax compliance obligations, the bill provides that any buyback of at least one class of shares should be notified to the direct tax authorities within the framework of the company’s annual tax return, providing information that allows the identification of any individual concerned by the redemption or withdrawal of a class of shares if this individual holds a significant participation as defined by Article 100 LITL.

Finally, it is important to note the redemption/buyback of a class of shares could fall into the scope of Luxembourg anti-abuse rules (cf. paragraph 6 of the amended tax adaptation law of October 16, 1934).

This legislative change regarding the class of shares mechanism is not the only new measure introduced by the draft bill n°8388. We will keep you updated on the progress of the legislative process.

Feel free to reach out to our tax team if you have any questions.