Form Over Substance: Why The Luxembourg Tribunal's Share Premium Ruling Cannot Stand

01 INTRODUCTION

The repayment of share capital, share premium and other contributions is a common business transaction for Luxembourg companies. However, under certain conditions, such repayments may be reclassified as income from capital under Article 97 (1) No. 1 of the Luxembourg Income Tax Law (“LITL”) (which includes dividends and other distributions). This would trigger a 15% Luxembourg withholding tax¹, unless a reduced rate or exemption applies under Luxembourg domestic tax law or an applicable tax treaty.²

Article 97 (3) b) of the LITL provides that allocations made in consideration of a reduction in share capital are not treated as income from capital provided that the company has not capitalised reserves and has no distributable reserves at the time of distribution.