In a judgment dated 25 March 2026, the Luxembourg Lower Administrative Court (Tribunal administratif) ruled that distributions from a share premium reserve, undertaken in the absence of a formal share capital reduction, are prima facie subject to Luxembourg withholding tax (“WHT”) and do not benefit from the exemption under Article 97(3)(b) of the Luxembourg Income Tax Law (“LITL”).
Background and context
The taxpayer, a Luxembourg listed company (the "Company"), had built up a share premium reserve following its IPO and subsequent capital increases. This reserve was partially used to offset accounting losses. Once the company returned to profitability, it reallocated profits back to the share premium account, without exceeding the historical amount contributed by shareholders.
In December 2018, the Company requested a tax ruling from the Luxembourg tax authorities (Administration des contributions directes, “ACD”), seeking confirmation that a planned distribution from the share premium reserve would qualify as a tax-neutral repayment of capital and thus fall outside the scope of the 15% WHT. The ACD rejected this request.
In April 2019, the Company nonetheless proceeded with the distribution. In July 2019, the ACD issued a WHT assessment, which the Company now sought to annul before the Lower Administrative Court, arguing that the distribution should be treated as a non-taxable reimbursement of shareholder contributions.
Key legal question
The key legal question before the Lower Administrative Court was whether a distribution from a share premium reserve – undertaken without a formal reduction of share capital - can qualify as a tax-neutral repayment of initial contributions made by the shareholders under Article 97(3)(b) of the LITL, or whether it must be treated as capital income under Article 97(1) of the LITL.
More specifically, the dispute focused on the interpretation of the notion of “reduction of share capital” and whether it extends to the repayment of share premium reserves only, which are economically linked to shareholder contributions but legally distinct from share capital.
The Lower Administrative Court's reasoning
On the scope of Article 97(3)(b) LITL
The Lower Administrative Court held that Article 97(3)(b) LITL must be interpreted strictly. The exemption applies only to distributions made in the context of a formal share capital reduction carried out in accordance with company law requirements.
As Luxembourg tax law does not define “share capital” or “share premium,” the Lower Administrative Court relied on company law principles. Referring to the normalised chart of accounts and corporate law concepts, it confirmed that while share premium forms part of a company’s equity (fonds propres), it does not constitute share capital (capital social).
Accordingly, the Lower Administrative Court concluded that the concept of “share capital reduction” does not cover standalone reimbursements of share premium. In the absence of a formal reduction of share capital, such distributions fall outside the scope of Article 97(3)(b) LITL.
On the application of Article 97(1) LITL
Having excluded the Article 97(3)(b) LITL, the Lower Administrative Court assessed whether the distribution falls within the scope of Article 97(1) LITL.
It noted that Article 97(1) is broadly drafted and covers all products derived from shares, profit-sharing certificates, or similar participations.
The Lower Administrative Court held that a reimbursement of share premium, being a distribution made out of the company’s net assets to its shareholders, it constitutes a “product” within the meaning of Article 97(1) LITL and thus capital income. This applies regardless of whether the distribution is characterised as a dividend, a profit distribution, or a share premium reimbursement.
As the distribution did not fall within any of the exceptions listed in Article 97(3) LITL, it was therefore considered as capital income subject to WHT.
On the comparative German law and "economic common sense" arguments
The Company argued that relying on German tax law and Bundesfinanzhof case law, share premium reimbursements should be treated as tax-neutral returns of capital. The Lower Administrative Court however rejected this argument, noting that the Company had not demonstrated that such principles were incorporated into Luxembourg law or reflected in the legislative intent of the LITL. The Lower Administrative Court also dismissed the “economic common sense” argument. While acknowledging that interpretative principles may, in some cases, rely on considerations of common sense, it held that such reasoning can only play a subsidiary role and cannot override clear legal provisions. Its function is limited to avoiding manifestly absurd results.
Conclusion
The Lower Administrative Court confirmed the position of the ACD that a repayment of share premium without a formal reduction of share capital falls within the scope of Article 97(1) LITL, constituted capital income and is subject to Luxembourg WHT under Article 146 LITL unless a WHT exemption or reduction under a double tax treaty or the participation exemption regime applies.
This judgment is likely to be appealed in front of the Higher Administrative Court (Cour administrative), given its significance and its practical implications. Indeed, the Lower Administrative Court adopted a strict literal interpretation of Article 97(3) LITL, aligning the concept of “share capital” with its company law meaning and treating the distinction between share capital and share premium as decisive, rejecting the substance-over-form and the “economic common sense” approach, which is noteworthy particularly in light of the broader role that substance-over-form considerations play in most Luxembourg tax law and the unintended outcome this conclusion could have in certain situations.
What this means for you
This judgment has immediate practical implications for Luxembourg companies and their shareholders that intend to make distributions from share premium reserves without accompanying it by formal share capital reductions, as those would be subject to 15% WHT (unless exempt under other provision of the LITL or double tax treaties).
Given the likelihood of an appeal, further developments should be closely monitored.
Share on
