New rules on simplified liquidations tax regime
On 19 July 2024, the Luxembourg Tax Authorities (LTA) released a new Circular1 that brings much-needed clarity to the tax implications of: the “dissolution without liquidation” under article 1865bis of the Civil Code.
What does “simplified liquidation” mean?
Simplified liquidation was introduced in 2016 with the goal of making it easier to close a business with just one shareholder.
Instead of going through a lengthy liquidation process, the sole shareholder can wrap things up quickly, provided they are up-to-date with tax and social security contributions.
With just a single notary deed, the company is dissolved, its registration is removed from the Luxembourg Business Register, and all assets and liabilities transfer immediately to the shareholder.
This approach stands in contrast to the standard liquidation process, which involves a more drawn-out winding-up phase.
Simplified liquidation is all about speed and efficiency, which is particularly valuable for those looking to exit or restructure their business operations without delay.
What does the new Circular clarify?
The Circular released sheds light on two critical variables that could impact businesses:
- Tax treatment alignment with mergers: For tax purposes, a dissolution without liquidation is treated similarly to a merger. Basically, it’s considered a liquidation, meaning any hidden or unrealized gains are taxed immediately. However, if specific conditions are met, companies can benefit from a tax-neutral regime similar to those applicable to mergers—whether they’re domestic or involve another EU/EEA country. This can help companies avoid sudden tax liabilities if they meet the criteria.
- Continuation of Net Wealth Tax (NWT) reserves: Luxembourg companies tend to set up a special reserve to reduce their NWT liability. The Circular clarifies that this benefit can continue even after a company dissolves under the simplified method. The shareholder who inherits the assets can maintain the NWT reserve without breaking the required five-year holding period, which can be useful for financial planning.
How does this compare to traditional liquidation?
When a company dissolves through the standard procedure, it’s subject to more rigorous tax rules, leading to a longer, more complex process and different approaches to handling gains and reserves.
The new Circular targets dissolution using the simplified method, emphasizing that traditional liquidations are handled under existing, more stringent regulations.
What does this mean for Corporate Income Tax (CIT)?
Under the new rules, the simplified dissolution mirrors the legal consequences of a merger.
This alignment extends to how CIT and Municipal Business Tax (MBT) are calculated.
Since the operation is treated as a liquidation, any latent gains that weren’t realized are taxed right away, unless the company qualifies for the tax-neutral regime.
This can have a major impact on companies planning their exit strategies, as it may affect the final tax amount due.
For companies that qualify for the tax-neutral regime, the rules offer a smoother transition without immediate taxation.
This is particularly beneficial for cross-border companies operating within the EU, as it provides greater flexibility in how they approach restructuring or winding down, avoiding unexpected tax hits.
NWT: preserving the special reserve?
Luxembourg businesses can use a special reserve to reduce their NWT liability, setting aside part of their profits from the previous year.
The NWT reduction cannot exceed the prior year's corporate income tax liability, and there’s a minimum threshold below which the NWT cannot fall.
For companies going through a simplified dissolution, the Circular offers a key clarification: the special reserve must be established before the end of the financial year, making it essential to act swiftly at the time of dissolution.
Furthermore, the shareholder who takes over the assets can continue using this special reserve, ensuring that the five-year period remains intact even after the company has dissolved.
This continuity can provide a better financial transition and help avoid disruptions in tax planning.
In contrast, for companies undergoing traditional liquidation, this benefit ends once the liquidation process is complete.
As a result, any NWT advantages tied to the reserve would no longer apply, making the simplified approach more suitable in certain cases.
Final thoughts
The Circular represents a significant development for businesses with a single shareholder.
It provides a faster way to conclude operations while still allowing for some tax advantages.
By aligning the process with existing rules for mergers and offering continuity in handling NWT reserves, it provides a valuable tool for shareholders aiming to maintain their financial strategies beyond the company's lifecycle.
For those who are unfamiliar with the complexities of Luxembourg’s corporate landscape, understanding these new rules is of the utmost importance for making well-informed decisions about when and how to close a business.
1. Circular L.I.R. n° 170/1, 170bis/1, I.C.C. n° 44, I.Fort. n° 55.
