On 27 January 2023, the Lower Administrative Court (Tribunal adminsitratif) took, in case no. 42432, after nearly 4 years of procedures, a long awaited decision on the tax treatment applicable to the redemption of so-called alphabet shares. To the best of our knowledge this is the first case-law to ever touch on the topic of alphabet shares redemption as well as only the second one generally dealing with share redemptions after the decision of the Higher Administrative Court No. 39193C dated 23 November 2017.
In the case at hand, the taxpayer redeemed from its single shareholder a class of alphabet shares that according to its articles of incorporation gave right to almost all profits of the company. The taxpayer treated this redemption followed by the cancelation of the class of shares as a commercial buy-and sell transaction and did not subject to acquisition price to withholding taxes. The Luxembourg tax authorities did not agree with this qualification and requalified the transaction as abusive, treating it rather as a hidden dividend distribution subject to 15% withholding taxes.
The taxpayer, represented by BSP, appeal this decision in front of the Lower Administrative Court, arguing in essence that neither the fact that all the classes of shares were held by the same single shareholder, nor the fact that they were put in place shortly before the transaction was abusive or even constitutive of a hidden dividend distribution, given that the transaction undertaken by the taxpayer was not a dividend distribution, where ones receives from the fruits of its investment, but rather a disposition of an asset, where one ceases to hold the right to income going forward, thus disposing of the source of income altogether.
The Lower Administrative Court after carefully reviewing the arguments of the parties and the facts, which represent a slightly different, albeit way more common, fact pattern than the one covered by the previous decision of the Higher Administrative Court, nonetheless took the same position as the Higher Administrative Court before it: that a redemption of a class of shares is an entirely different transaction than a distribution of dividends, facing not only different corporate law constraints, but also different economic consequences for the seller and the buyer of said shares, such that any redemption of a class of shares cannot be qualified as a hidden dividend distribution, unless the price paid for said class of shares is higher than the fair market value of the redeemed shares, in which case the excessive amount could be requalified as a hidden dividend distribution. In other words, solely abusive transactions should be requalified. The Lower Administrative Court then decided to send the file back to the tax authorities in order for them to assess the fair market value of the shares redeemed and assess whether the amounts paid are in excess of it, allowing them to requalify only the part of the redemption that exceeds the fair market value, if any.
This decision taken by the court provides much welcomed clarity and guidance to taxpayers and advisors and will help strengthen and establish the previous decision of the Higher Administrative Court going forward. While the State still has the possibility to appeal before the Higher Administrative Court for a period of 40 days, the tax treatment of redemptions of shares, which has been subject to doctrinal positions and nuances in the past, seem inching towards clarity.