Luxembourg minimum net wealth tax ruled partly unconstitutional

The decision of the constitutional court follows a preliminary ruling request filed by the Luxembourg Administrative Tribunal on 18 April 2023 (TA n°45910) regarding the conformity of paragraph 8 (2) a) of the net wealth tax law with the principle of equality before the law.

Luxembourg net wealth tax regime

As a matter of principle, Luxembourg resident companies are subject to net wealth tax (hereafter NWT) on their net wealth at the following scale of rates (paragraph 8 (1) NWT law):

• On a taxable base of up to EUR 500 million: 0.5%;
• On a taxable base exceeding EUR 500 million: NWT of EUR 2.5 million, plus 0.05% on the portion of the NWT base above EUR 500 million, without any cap.

The NWT law further provides a minimum amount of NWT to be born by all Luxembourg resident companies as follows (paragraph 8 (2) NWT law):

• Entities with aggregated fixed financial assets, transferable securities, inter-company receivables, and cash in excess of both 90% of their total gross assets AND EUR 350,000 will be subject to a minimum NWT charge of EUR 4,815 (paragraph 8 (2) a) NWT law).
• All other companies will be subject, based on paragraph 8 (2) b) of the NWT law, to a minimum NWT charge ranging from EUR 535 to EUR 32,100, depending on the company’s total gross assets, as follows:

Case brought in front of the administrative tribunal

A taxpayer with a negative unitary value had been requested the payment of the minimum tax of EUR 4,815 by the Luxembourg tax authorities in accordance with the above referred paragraph 8 (2) a) NWT law.

The taxpayer considered that it should rather be subject to the minimum tax for an amount of EUR 1,605 arguing that the criteria in paragraph 8 (2) of the NWT tax law were arbitrarily set and that the application of this provision to its situation was discriminatory, compared to other taxpayers which would be subject to a lower minimum net wealth tax of EUR 1,605, due to the fact that their aggregated fixed financial assets, transferable securities, inter-company receivables, and cash would not represent more than 90% of their total gross assets. In the view of the taxpayer, the difference in treatment is therefore linked to the structure of the balance sheet which would, in theirview, appear to be unjustifed.

Decision of the constitutional court

The constitutional court first examined whether the situations of the taxpayers falling under the two sub-paragraphs of the provision were comparable and whether the difference in treatment was objectively justified and proportionate. The court found that taxpayers would sufficiently be comparable in terms of their balance sheet structure when they all have more than 90% of their assets represented by the four categories of assets mentioned in the provision (i.e. accounts 23, 41, 50 and 51 of the standard chart of accounts). In other words, taxpayers with a different balance sheet structure may not be considered as being in comparable situations although their total of balance sheet would be in the same range (i.e. above EUR 350,000 and below EUR 2,000,000).

The court found however that the additional criterion of paragraph 8 (2) a of the NWT law requiring the sum of their assets represented by the four categories of assets (i.e. accounts 23, 41, 50 and 51 of the standard chart of accounts) to not only exceed 90% of their total balance sheet, but to also exceed EUR 350,000, was not rationally justified, as no explanation was provided by the state representative or inferred from the parliamentary works. Moreover, the court held that the provision violated the principle of taxation according to the contributive capacity of the taxpayer which is to be assessed based on the economic reality.

The constitutional court concluded that the provision requiring that the above referred four categories of assets do not exceed EUR 350,000 to be liable to the lower minimum tax provided for in paragraph 8 (2) b) was contrary to article 10bis, paragraph 1, of the constitution, as well as to article 15 of the revised constitution, which has the same wording and entered into force on 1 July 2023. The court ordered that, pending a legislative reform, the taxpayers falling a priori under the provision of paragraph 8 (2) a) should be subject to the minimum wealth tax of paragraph 8 (2) b) whenever it is more favorable.