Luxembourg: Luxembourg Minimum Net Wealth Tax Provisions Declared Partly Unconstitutional

Main takeaways

• On 10 November 2023, the Luxembourg Constitutional Court ruled that certain provisions of the Luxembourg minimum net wealth tax were contrary to constitutional principle of equality.

• Pending a change in the law, corporate taxpayers which, as at 1^st January, own financial assets representing more than 90% of their total balance sheet, and with the latter comprised between EUR 350,000 and EUR 2,000,000, should become subject to a minimum net wealth tax amounting to EUR 1,605 (instead of EUR 4,815).

• Taxpayers in this situation that have been assessed since less than 3 months may file an appeal to see the decision applied

Net wealth tax and minimum net wealth tax

Luxembourg corporate taxpayers are subject to a net wealth tax ("NWT") at the rate of 0.5% (0.05% for part of the wealth exceeding EUR 500 million). The net wealth tax applies on the taxpayer's unitary value, which generally corresponds to the (fair) net asset value (subject to certain adjustments), as per 1^st January of each year.

The amount of the NWT is subject to a minimum amount determined based on the provisions of §8(2) of the net wealth tax law (VStG). For the computation of this minimum NWT, a difference is made with companies that mainly hold "financial assets", being those recorded in the balance sheet in accounts 23 (financial fixed assets), 41 (amounts owed by affiliated entities), 50 (transferable securities) and 51 (cash at bank) of the Luxembourg standard chart of accounts.

Determination of the minimum NWT

Based on §8(2) VStG, the minimum NWT is determined as follows:

a) : for companies with financial assets (as defined above) representing more than (i) 90% of the total of the total balance sheet and (ii) 350,000 EUR, the minimum NWT amounts to EUR 4,815.

b) : for other companies, i.e. those not meeting the thresholds under a), the minimum net wealth tax is determined based on the total balance sheet :

Decision of the Constitutional court

The unconstitutionality of §8(2) VStG was raised in a litigation pending in front of the Luxembourg Administrative Tribunal (TA 18/04/2023, n°45910), opposing a taxpayer having a negative unitary value and the Luxembourg tax authorities. In this case, the taxpayer had a total balance sheet comprised between EUR 350,000 and EUR 2,000,000 and had been imposed to the minimum NWT of
EUR 4,815 due to its financial assets reaching both the 90% and the EUR 350,000 thresholds.

The taxpayer considered that the provisions of the law resulted in an unfair situation where the (EUR 4,815) NWT due was threefold the amount of NWT due by other companies owning a similar wealth without exceeding 90% threshold (i.e. EUR 1,605). According to the taxpayer such difference existed because of the introduction of an arbitrary criteria (i.e. the 90% threshold of certain qualifying financial assets) being not in line with the rationale of the NWT nor with the constitutional principle of equity (former article 10bis, current article 15 of the Constitution).

In this context, the taxpayer requested the Tribunal to raise the question of the validity of §8(2) VStG with the Constitutional Court.

The Court recalled that even if the law may, without violating the principle of equality, subject certain categories of persons to different legal regimes, the difference must be appropriate, rationally justified, and proportionate. The Court found that in the case of §8(2) a) VStG, the discriminatory distinction made among taxpayers, facing otherwise similar circumstances, could not find a justification. Consequently, the Court decided that the provision of §8 (2) a) VStG was contrary to the Constitution.

Impact

Pending a change in the law, taxpayers falling under §8 (2) a) VStG (i.e. taxpayers which have "financial assets" exceeding 90% of their total balance sheet and EUR 350,000) may benefit from the taxation under §8 (2) a) VStG (i.e. gradual taxation) whenever more favourable.

In practice, such taxpayers, whose balance sheet is comprised between EUR 350,000 and EUR 2,000,000 should be subject to the minimum net wealth tax of EUR 1,605 instead of EUR 4,815.

Taxpayers in this situation with NWT assessment less than three months old may file an objection against the assessment to claim the benefit of the lower NWT liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.