On 10 November 2023, the Constitutional Court (case n°00185) held that some of the Luxembourg minimum net wealth tax rules are in breach of the principle of equality before the law of the Luxembourg Constitution.
It results those taxpayers subject to the EUR 4,815 minimum net wealth tax (i.e., mainly holding companies) should be subject to the EUR 1,605 minimum net wealth tax if their total balance sheet does not exceed EUR 2,000,000.
Net wealth tax and minimum net wealth tax
Luxembourg corporate taxpayers are subject to net wealth tax levied on their net assets, as at 1st January, at a rate of 0.5% for net assets up to EUR 500 million and at a rate of EUR 0.05% for the portion of net assets exceeding EUR 500 million (the ordinary net wealth tax).
A minimum net wealth tax applies where it exceeds the above ordinary net wealth tax as provided by paragraph 8, point 2 of the net wealth tax law or Vermögensteuergesetz (“VStG”). This paragraph provides for two alternatives:
Point a) provides that taxpayers will be subject to a minimum net wealth tax of EUR 4,815 in case the sum of account’s classes 23 (fixed financial assets), 41 (inter-company receivables), 50 (transferable securities) and 51 (cash at bank) exceeds 90% of their total balance sheet total and EUR 350,000.
Point b) provides for a minimum net wealth tax ranging from EUR 535 to EUR 32,100 depending on the taxpayer's total balance sheet. Specifically, in case of the total balance sheet exceeds EUR 350,000 but is below EUR 2,000,000, the taxpayer should be subject to a tax of EUR 1,605.
Thus, taxpayers with a total balance sheet exceeding EUR 350,000 and below EUR 2,000,000 are liable to a different amount of minimum net wealth tax depending on the composition of their balance sheet.
Facts of the case
A Luxembourg company held liable to the EUR 4,815 minimum net wealth for fiscal year 2019, claimed that this tax treatment is not compliant with the Constitutional principle of equality before the law since taxpayers with the same total balance sheet (higher than EUR 350,000 and lower than EUR 2,000,000) are subject to a different tax liability depending on the composition of their balance sheet. Following an unsuccessful claim filed with the Director of the Direct Tax Administration (Directeur des Contributions), the taxpayer brought the case before the Lower Administrative Court.
On 18 April 2023, the Lower Administrative Court referred to the Constitutional Court, the only jurisdiction entitled to assess the compatibility of a legislation with the Constitution (see our previous newsletter on the case).
Key features
The Constitutional Court analysed the minimum net wealth tax rules in the light of Article 10bis, paragraph 1 of the Constitution and Article 15 of the Constitution applicable since 1st July 2023 addressing the principle of equality before the law which from a tax standpoint implies that tax liability should be set according to taxpayers’ ability to pay (i.e., two taxpayers with the same ability to pay should be liable to the same tax liability).
As a first step, the Constitutional Court analysed whether the minimum net wealth tax rules result in a different tax treatment of taxpayers placed in a comparable situation. The Constitutional Court found that paragraph 8, point 2) a) and b) VStG relates to any taxpayers with a balance sheet composed for more than 90% of assets booked under accounts 23, 41, 50 and 51 of standard chart of accounts, so that these taxpayers should be deemed in a comparable tax position.
However, paragraph 8, point 2) a) VStG sets a distinction in the tax treatment of these taxpayers based on the additional criterion of having above mentioned accounts exceed the amount of EUR 350,000.
Hence, points 2 a) and 2 b) of paragraph 8 VStG state for a different tax treatment of taxpayers in a comparable situation (i.e., in terms of balance sheet composition).
Secondly, the Constitutional Court analysed whether this distinction set by the law is based on an objective difference, is rationally justified, appropriate and proportionate to its objective, as in such case a legal provision can depart from the principle of equality. However, no rational justification could be found by the Court to retain the criterion of having the total of certain assets exceeding EUR 350,000. As a result, this distinction shall be considered as disregarding the ability to pay of the taxpayers subject to this criterion.
Conclusion
The Constitutional Court concluded that point a) of paragraph 8 point 2 of the VStG is not in conformity with the principle of equality before the law and should be amended. As a result, the taxpayer can apply the most favourable rules. In practice, taxpayers subject to the EUR 4,815 minimum net wealth tax and whose total balance sheet does not exceed EUR 2,000,000, shall be subject to a minimum net wealth of EUR 1,605.
The Constitutional Court decision should have a direct effect on all current disputes and for all taxpayers from the date on which the decision takes effect (the day after publication). In addition, the Luxembourg Tax Authorities should apply the decision to any corporate and net wealth tax returns filed but not yet taxed. Taxpayers that have been assessed since less than 3 months may lodge a claim to have the decision applied.