Legal Background

Luxembourg resident companies are subject to a Luxembourg minNWT of either:

• a flat tax of 4,815 EUR if certain of their assets (i.e., fixed financial assets, intercompany receivables, transferable securities, and cash at banks: collectively the “Qualifying Assets”) exceed (i) 90% of their total balance sheet (the “90% Threshold”) and (ii) the amount of 350,000 EUR; or

• a progressive tax between 535 EUR and 32,100 EUR depending on the total amount of their balance sheet.

Issue

In a situation where a taxpayer has Qualifying Assets between 350,000 EUR and 2,000,000 EUR, the minNWT due will be 4,815 EUR if the 90% Threshold is met, whilst it would be 1,605 EUR if such threshold would not be met. In the case at hand, a taxpayer with Qualifying Assets amounting between 350,000 EUR and 2,000,000 EUR and where the 90% Threshold was met considered (i) the application of the 4,815 EUR flat tax as discriminatory compared to the progressive tax of 1,605 EUR applicable to a same taxpayer where the 90% Threshold would not be met and (ii) the difference of treatment solely based on a criterion linked to the composition of the balance sheet as unconstitutional.

Decision

Whilst seemingly considering that the 90% Threshold would sufficiently differentiate taxpayers from other taxpayers not meeting such threshold, the constitutional court found that the additional criterion of Qualifying Assets having to exceed 350,000 EUR (i) unjustified as its rationale could not be explained by the government representative or inferred from the parliamentary documents, and (ii) not in line with the principle of fair taxation based on a taxpayer's financial capacity.  

Consequently, the constitutional court considered the flat tax of 4,815 EUR under the Luxembourg minNWT unconstitutional as submitting taxpayers in a similar situation (i.e., taxpayers meeting the 90% Threshold but having Qualifying Assets of either below or above 350,000 EUR) to a different taxation.

Pending a legislative reform to the minNWT regime, the constitutional court ruled that the progressive tax must be applied to taxpayers whenever it is more favourable than the flat tax.

Conclusion

This decision will have a positive impact but only on Luxembourg taxpayers where the 90% Threshold is met and the Qualifying Assets amount between 350,000 EUR and 2,000,000 EUR as such taxpayers may henceforth benefit from a minNWT of 1,605 EUR instead of 4,815 EUR.

An upcoming legislative reform of the minNWT regime is to be expected, which will be monitored by our tax team.

The full text of the decision was published in the Memorial A745 of 20 November 2023 and is available here (in French only). Please do not hesitate to contact our tax team in case of any questions regarding the above decision or how it may impact your Luxembourg company.

Should you need any further information, please liaise with Gérard Neiens, Jean-Philippe Monmousseau, or Grâce Mfuakiadi.

Authored by Gérard Neiens, Jean-Philippe Monmousseau, and Grâce Mfuakiadi.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}