Luxembourg - Minimum Net Wealth Tax Regime Partially Unconstitutional

Background

On 10 November 2023, the Luxembourg Constitutional Court ruled that the current minimum net wealth tax regime, as applied to Luxembourg resident companies, partially violates the constitutional principle of equal treatment.

In summary, Luxembourg resident companies are in principle subject to net wealth tax levied annually at a rate of 0.5% on their net asset value, with any portion of such wealth exceeding EUR 500,000,000 being subject to a rate of 0.05%.

The law also provides for minimum net wealth tax rules derogating to the principle. It is stated that a minimum net wealth tax of EUR 4,815 is applicable to Luxembourg resident companies whose financial fixed assets, transferable securities, intercompany receivables, and cash deposits exceed EUR 350,000 and 90% of their total gross assets. In all other situations, Luxembourg resident taxpayers are subject to a minimum net wealth tax determined under a progressive scale ranging between EUR 535 and EUR 32,100.

On the basis of the constitutional principle of equal treatment, this difference of treatment has been challenged by a taxpayer before the Luxembourg jurisdictions.

Decision

In the present case, the Luxembourg tax authorities had imposed the EUR 4,815 minimum net wealth tax on the taxpayer with a negative net asset value but a balance sheet total between EUR 350,000 and EUR 2,000,000. The taxpayer argued that it should have been instead subject to the EUR 1,605 minimum net wealth tax that would apply under the progressive scale.

The Luxembourg Constitutional Court has decided that this minimum net wealth tax of EUR 4,815 applicable to only certain companies having qualified holdings and financing assets exceeding 90% of their total balance sheet was discriminatory as some taxpayers who would otherwise be subject to the EUR 4,815 minimum net wealth tax should instead be subject to the lower minimum net wealth tax of EUR 1,605, until the law is changed.

The Court reminded in its decision that the law, without infringing the constitutional principle of equality, may subject certain categories of persons to different legal regimes, provided that the difference instituted arises from objective disparities and that it is rationally justified, appropriate and proportionate to its aim. However, no justification could be provided in the present case for the difference in treatment. Moreover, the Court held that the provision with respect to the EUR 4,815 minimum net wealth tax violated the principle of taxation according to the contributive capacity of the taxpayer which is to be assessed based on the economic reality.

Impact on Taxpayers and Next Steps

This decision primarily affects entities with a total balance sheet between EUR 350,000 and EUR 2,000,000 and with qualified holdings and financing assets exceeding 90% of their total gross assets. These entities should now be subject to a minimum net wealth tax of EUR 1,605, replacing the previous EUR 4,815 flat amount, pending a legislative reform.

If some taxpayers are liable to net wealth tax, such as Luxembourg holding companies, their situation should be assessed to determine if a lower net wealth tax could be applicable. If a higher rate has been previously paid, the taxpayer may be eligible for a refund and claim the benefit of a lower net wealth tax liability.

The Luxembourg government and Parliament should be expected to address this decision with a legislative reform with respect to the unconstitutional aspects of the net wealth tax rules. Until then, the progressive scale should be applicable.

 

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