Incompatibility of the Minimum Net Worth Tax of EUR 4,815 with the Luxembourg Constitution

AIQUNITED-TEAM / December 14th

The Luxembourg constitutional court ruled on 10 November 2023 (case 00185) that the Luxembourg minimum net worth tax (the “NWT”) of EUR 4,815 is anti-constitutional. This decision entails that taxpayers which are normally subject to the flat-rate minimum NWT of EUR 4,815 due to the composition of their balance sheet, may now be subject to the minimum NWT of EUR 1,605 if their total balance sheet is comprised between EUR 350,001 and EUR 2 million, provided that this is more favourable to them. The Court’s ruling stipulates that such tax treatment will be maintained until the legislator reforms the disputed provision. Please find in the following a summary of the ruling as well as our recommendation for actions.

A Luxembourg corporation (the “Taxpayer”) filed a complaint requesting the Head of the Luxembourg Tax Authorities to amend a net worth tax assessment notice according to which the Luxembourg corporation is subject to the minimum Luxembourg NWT of EUR 4,815 according to paragraph 8(2)(a) of the Luxembourg net worth tax law of 16 October 1934 (the “NWT Law”). As the  complaint was rejected by the Head of the Luxembourg Tax Authorities, the Taxpayer appealed the decision before the Luxembourg Administrative Tribunal (the “Tribunal”) claiming, among other things, that the decision was partially incompatible with Article 10bis(1) of the Luxembourg Constitution as applicable before 1 July 2023 (the “Luxembourg Constitution”)[1]. The Tribunal accepted the case and, before rendering its judgement, requested a preliminary ruling from the Luxembourg Constitutional Court (the “Constitutional Court”) to examine the compatibility of paragraph 8(2)(a) of the NWT Law with Article 10bis(1) of the Luxembourg Constitution, which guarantees the principle of equal treatment of Luxembourg taxpayers. 

Under paragraph 8 of the NWT Law, Luxembourg corporations are generally subject to the standard NWT of 0.5% on a NWT base of up to EUR 500 million and EUR 2.5 million plus 0.05% on the portion of the NWT base exceeding EUR 500 million.

However, by exception to the general rule, Luxembourg corporations are also subject to a minimum net worth tax amounting to EUR 4,815 pursuant to paragraph 8(2)(a) of the NWT Law if the two following criteria are fulfilled simultaneously:

  1. the aggregate of fixed financial assets, transferable securities, intercompany receivables, and cash (the “Financial Assets”) exceeds 90% of the total balance sheet, and
  2. the total Financial Assets exceed EUR 350,000.

When Luxembourg corporations do not simultaneously fulfil these two criteria, they are still subject to a minimum NWT referred to in paragraph 8(2)(b) of the NWT Law, ranging from EUR 535 to EUR 32,100 depending on company’s total balance sheet (and regardless of its composition).

The minimum NWT applies, provided that its amount exceeds the amount of the standard net worth tax.

The Taxpayer based its argumentation on the difference in tax treatment between corporations who are subject to the minimum NWT of EUR 4,815 on the sole criterion that their total balance sheet is composed of more than 90% of Financial Assets compared to corporations not investing in Financial Assets however exceeding the EUR 350,000 threshold. In the latter case, the NWT charge would only amount to EUR 1,605 compared to EUR 4,815 (provided the additional condition is fulfilled that the total balance sheet does not exceed EUR 2 million). The Taxpayer points out that such difference of tax treatment is therefore not objectively justified. The reason for such a different treatment goes back to the Luxembourg legislator who, when introducing the minimum NWT of EUR 4,815, initially had the circumstances of financial holding companies (Soparfis) in mind, which were only marginally subject to the NWT (due to the tax exemption of participations, AIQUNITED’s note).

The Tribunal therefore requested a preliminary ruling from the Luxembourg Constitutional Court (the “Constitutional Court”) in order to examine with regard to Article 10bis of the Luxembourg Constitution whether a discrimatory tax treatment exists between two Luxembourg corporations with a total balance sheet greater than EUR 350,000 when the Financial Assets of one corporation exceed 90% of its total balance sheet, while the Financial Assets of the other do not exceed such threshold.

In other words, the Tribunal requested whether two taxpayers in a comparable tax situation (i.e., subject to a minimum NWT according to paragraph 8(2) of the NWT Law) are nevertheless subject to a different NWT burden based solely on their investment in Financial Assets.

The Constitutional Court addressed the difference in the NWT burden when the EUR 350,000 threshold is surpassed in the context of Article 10bis(1) of the Luxembourg Constitution according to which all Luxembourg citizens are equal before the (tax) law. The Constitutional Court attributed the reason for the difference in tax treatment to the additional requirement provided by paragraph 8(2)(a) of the NWT Law, namely as soon as Financial Assets exceed the threshold of EUR 350,000. Depending on the situation, taxpayers falling within the scope of paragraph 8(2)(a) of the NWT Law would therefore be subject to a minimum NWT of EUR 4,815 as opposed to a NWT tax of EUR 1,605 solely due to the nature of the assets they booked in their balance sheet. This difference in tax treatment has therefore been disputed by the Constitutional Court on the grounds that it disregards the taxpayers’ taxable capacity. Consequently, the Constitutional Court ruled that paragraph 8(2)(a) is unconstitutional. The Constitutional Court emphasized in its decision that this position should already be implemented in anticipation of a forthcoming legislative reform by specifying that when a taxpayer is likely to fall under the minimum NWT of EUR 4,815, the minimum NWT of paragraph 8(2)(b) should apply whenever it is more favourable (e.g., the NWT of EUR 1,605 when the taxpayer’s total balance sheet range between EUR 350,001 and EUR 2 million).

The decision of the Constitution Court means that, in practice, Luxembourg corporations (whether Soparfis or not) that are covered by this case may benefit from this decision. Specifically, this decision should apply to Luxembourg corporations not yet taxed, pending a change in the Luxembourg legislation. Therefore, pending NWT tax assessments should be analysed against this background. AIQUNITED will be happy to assist with this.

[1] Article 15 of the Luxembourg Constitution as amended on 1 July 2023.

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