Adaptation Project Of The General Tax Law, The Income Tax Law And The Net Wealth Tax Law

I. Legislative intervention in the area of MNWT following the Constitutional Court's ruling No. 185/23 of 10 November 2023 (amendment of § 8, subparagraph 2 of the VstG)

As a reaction to the Constitutional Court's ruling No. 185/23 of 10 November 2023, the legislator proposes to draw the appropriate lessons from it by simplifying the flat MNWT system. In this respect, it seems appropriate to recall that § 8, subparagraph 2 of the VstG establishes two MNWT regimes, namely that of the progressive MNWT, as provided for in point b) of subparagraph 2, and that of the flat MNWT, as provided for in point a) of the same subparagraph. While the former is based solely on the total balance sheet and applies to operating companies, the latter focuses on the composition of the closing balance sheet and mainly concerns financial holding companies, also known as SOPARFIs.

Pursuant to § 8, subparagraph 2, point a) of the VstG, a collective entity is subject to a MNWT of 4,815 euros if the sum of its financial assets exceeds both 90% of its balance sheet and the threshold of 350,000 euros. Financial assets are defined as all assets that must be recorded in accounts 23, 41, 50 and 51 of the standard chart of accounts. According to § 8, subparagraph 2, point b) of the VstG, the progressive MNWT varies between 535 euros and 32,100 euros, depending on the total balance sheet of the collective entity.

Under these rules, a taxpayer whose total balance sheet is greater than 350,000 euros and less than 2,000,000 euros is treated differently depending on whether or not the sum of his financial assets exceeds both 90% of his balance sheet and the 350,000 euro threshold. If the sum of his financial assets exceeds the 90% threshold without exceeding the 350,000 euro threshold, the taxpayer only has to pay a MNWT of 1,605 euros. On the other hand, if the sum of his financial assets exceeds both the 90% threshold and the 350,000 euro threshold, the taxpayer is liable for a MNWT of 4,815 euros.

In substance, the Constitutional Court ruled that the flat MNWT does not comply with the constitutional principle of equality of taxpayers, not only because of the 90% criterion but because of the addition of the threshold of 350,000 euros. Pending legislative intervention, the Court thus decided to apply the progressive MNWT to taxpayers who fall within the scope of the flat MNWT, whenever the progressive MNWT is more favorable. It should be noted that there is only one case in which the progressive MNWT is more favorable than the flat MNWT for a taxpayer whose sum of financial assets exceeds the two aforementioned thresholds, i.e. when the taxpayer's total balance sheet exceeds 350,000 euros but is less than 2,000,000 euros.

For the sake of bringing the current legislation into line, the Bill proposes to simplify the structure of the MNWT by basing the various MNWT bands exclusively on the criterion of the total balance sheet. In doing so, the legislator proposes to abolish purely and simply the criterion relative to the proportion of financial assets held by the taxpayers in relation to their total balance sheet.

II. Adjustment of certain provisions of the ITL, motivated by the need for legal certainty (amendment of Articles 32bis, paragraph 5, 101, paragraphs 1 et 2, 115, No. 15a and 154duodecies of the ITL)

Secondly, the Bill proposes to amend certain provisions of the ITL in order to clarify their application. Although the suggested amendments concern both the PIT and the CIT, the choice was made to focus exclusively on the CIT so that the present newsletter deals with corporate taxation.

II.A. The submission of the redemption or withdrawal of an entire class of shares to the partial liquidation regime

Here again, the legislator has decided to align with case law, this time administrative, and more specifically with the ruling of the Administrative Court of 23 November 2023 with roll number 39193C. The purpose of the amendment at stake is to clarify the tax treatment of the redemption or withdrawal of an entire class of shares in the event that this first transaction is followed by a capital reduction within six months of the redemption or withdrawal of the participation. In such a case, it is proposed to submit the redemption or withdrawal transaction to the favorable partial liquidation regime as set out by Article 101, paragraph 1 of the ITL. Moreover, the benefit of this regime is conditional upon the meeting of the following cumulative conditions:

Having said this, we must not lose sight of the fact that a redemption of class of shares followed by a capital reduction is likely to fall within the scope of § 6 of the Tax Adjustment Law of 16 October 1964, as amended, better known as the Steueranpassungsgesetz (the "StAnpG"). As the authors of the Bill have rightly pointed out, such a transaction may in fact be qualified as an abuse of law where the repurchase of an entire class has as its main objective, or as one of its main objectives, an avoidance or reduction of the tax burden that runs counter to the object or purpose of the tax law and is not genuine in view of all the relevant facts and circumstances (S. p. 10 of the Bill). In this respect, it is interesting to refer to the judgment handed down by the Lower Administrative Court on 14 June 2023 (n° 45759). In this decision, the Lower Administrative Court held, firstly, that all transactions carried out between the shareholder and the company itself, affecting the substance of the shares, including the repurchase of a shareholding by the company followed by a capital reduction, qualify as "proceeds from the disposal of the shareholding" and, consequently, as a profit on disposal for the transferring shareholder. That said, the Lower Administrative Court went on to clarify that the classification as a profit on disposal may be called into question: if the particular circumstances of the case show, that the transaction in question is in fact a hidden distribution of dividends. In such a case, as the administrative judges have pointed out, the taxpayer must be considered to have used an inappropriate path, devoid of valid economic motives, with the sole aim of obtaining a tax saving, namely an exemption from the 15% withholding tax. In addition to this 15% withholding tax, the company will then be obliged to reintegrate the hidden dividends into its taxable income, so that it will have to pay additional CIT.

II.B. The waiver of the half-dividend regime and the waiver of exemption under the parent-subsidiary regime

Other substantial innovation: the Bill introduces the possibility for the concerned companies to waive the benefit of the half-dividend regime. It is worth noting that the taxpayer has to exercise this option individually for each tax year and for each participation. Should the taxpayer fail to exercise this option, then the exemption provided for in No. 15a of Article 166 of the ITL will automatically apply.

In the same vein, the Bill introduces the possibility for the concerned companies to waive the benefit of the exemption under the parent-subsidiary regime, as set out in Article 166, paragraph 1 of the ITL. The specificity of this waiver lies in the fact that it is only available to taxpayers who meet the conditions for exemption of income from participation solely on the basis of the acquisition price of the participation, i.e. when this is less than or equal to 1,200,000 euros. In concreto, this means that the option is not available if the conditions for exemption are met by virtue of a participation of at least 10 %.

II.C. The certificate of conformity for fixed assets eligible for special depreciation under Article 32bis of the ITL

Moreover, the Bill proposes to empower the Minister responsible for the Maritime Affairs Commission to issue certificates of conformity for fixed assets eligible for special depreciation provided for in Article 32bis of the ITL. By the way, it should be highlighted that this amendment is all the more logical insofar as the Maritime Affairs Commission is the only body able to assess the completion and conformity of the fixed assets eligible for the said special depreciation.

III. Continuation of the digitalization of the filing of certain tax returns (amendment of § 168 of the AO and Article 152, title 2, paragraph 8 of the ITL)

In fine, the Bill provides for the continued digitalization of the filing of certain tax returns. More specifically, it is proposed to make it compulsory to file the following tax returns electronically: the declaration of withholding tax on directors' fees; and the declaration of withholding tax on remuneration and bonus tax credits. It should also be emphasized that this obligation applies to employers, the pension fund, bodies paying pecuniary benefits as well as payers of directors' fees.

IV. Next steps

As the Bill is currently in committee, following its review by the Council of State, the Chamber of Skilled Trades and Crafts and the Chamber of Commerce, the Bill will soon be presented and discussed in public session.