Share premium repayments under scrutiny

This 2nd edition of “Legal & Tax REvolution” focuses on the judgment of 25 March 2026 (No. 45846a) in which the Luxembourg Administrative Tribunal (5th chamber) addressed, for the first time, the interplay between share premium repayments and withholding tax. The Tribunal concluded that a distribution charged against the share premium reserve, absent a simultaneous formal reduction of share capital falls outside the protective scope of Article 97(3)(b) of the Luxembourg income tax law (LITL) and constitutes taxable income from movable capital subject to 15% WHT. This newsletter examines the reasoning of the Tribunal and its practical consequences.

Background: from advance ruling request to a WHT reassessment from the Luxembourg tax authorities

The dispute concerned a Luxembourg S.A (the “Taxpayer”), which had accumulated a share premium reserve at the time of its stock exchange listing and subsequent capital increases. Over time, the reserve was drawn upon to absorb accounting losses. When the Taxpayer returned to profitability, it resolved to reallocate part of its profits to the share premium account, though without exceeding the aggregate amount originally contributed by its shareholders. In December 2018, the Taxpayer sought an advance ruling from the Luxembourg tax authority (“ACD”), requesting confirmation that a planned distribution from the reconstituted share premium reserve would qualify as a non-taxable return of shareholder contributions. Having received a negative response from the ACD, the Taxpayer proceeded with the distribution in April 2019. The ACD subsequently issued a WHT assessment at a rate of 15% under Article 146 LITL, prompting the Taxpayer to file an annulment action before the Administrative Tribunal.

The core legal background: does “capital social” encompass share premium?

The case turned on the interpretation of Article 97(3)(b) LITL, which exempts from income taxation “allocations constituting the consideration for a reduction of share capital constituted by shareholder contributions”, provided the reduction is supported by serious economic reasons. The company contended that “capital social” in this provision should be read broadly as “fiscal capital” (capital fiscal), capturing all equity derived from shareholder contributions, including share premium. The Taxpayer relied on a 2020 Administrative Court ruling which, according to it, endorsed the notion of “fiscal capital” for Article 97(3) purposes. It further invoked German case law, parliamentary preparatory works, and the argument that taxing genuine returns of shareholder contributions would offend “economic common sense”. For its part, the ACD argued that no formal share capital reduction had taken place under the 1915 Company Law, that the amounts distributed originated from profits rerouted through the share premium account, and that the conditions of Article 97(3)(b) LITL were not met. Moreover, the ACD considers the German case law not relevant in the case at hand.

The Tribunal’s reasoning to confirm the reassessment of the ACD

First, on the scope of Article 97(3)(b) LITL, the Tribunal held that the LITL does not define “share capital” or “share premium”, and that these concepts must therefore be construed in light of company law. Under the 1915 Company Law and the normalised chart of accounts, share premium (account class 11) is a component of equity (capitaux propres) but remains legally distinct from share capital (account class 10). The Tribunal further noted that preparatory works expressly stipulate that repayments which do not take the form of a regular reduction of share capital remain taxable in all cases. The Tribunal reinforced this conclusion by reference to Articles 100, 147 and 164bis LITL, all of which define participation thresholds by reference to “capital” or “capital social” in the strict company law sense thereby excluding share premium.

Second, on the application of Article 97(1)(1) LITL, the Tribunal observed that this provision is deliberately drafted in broad terms, capturing “dividends, profit shares and other products allocated, in whatever form, by reason of a participation”. Drawing on the preparatory works, the Tribunal noted that subject to the exceptions under paragraph 3 of Article 97, any allocation to shareholders charged against the net invested assets is taxable as capital income. Since a share premium repayment operates as an allocation from net invested assets without triggering a reduction of the legal substance of the participation (i.e. shareholders’ rights remain unchanged and no shares are cancelled or reduced), the Tribunal classified it as a taxable “product” rather than a non-taxable return of capital. In addition, the Tribunal deemed it unnecessary to determine whether the distribution was factually a dividend or a genuine share premium repayment, since both are captured by Article 97(1)(1) LITL.

Third, on comparative German law and the “economic common sense” argument, the Tribunal held that foreign legislation and case law are devoid of legal value in domestic law. The Tribunal acknowledged that it may serve as an interpretive tool in limited circumstances, but only to avoid manifestly absurd outcomes, not to override clear statutory provisions.

Practical implications and outlook

The Tribunal’s ruling is sector agnostic and may carry consequences for holding structures where the underlying assets are real estate properties.

The decision has attracted criticism as it may indicate that the mere absence of a formal share capital reduction connected to a share premium repayment within the meaning of the 1915 Company Law jeopardizes any claim for WHT exemption under Article 97(3)(b) LITL, irrespective of the economic substance of the transaction or the genuine origin of the distributed funds (i.e., even in the absence of current year profits or retained earnings).

Although the judgment specifically addresses share premium, its reasoning arguably extends to repayments of contributions booked under account 115. Account 115, like share premium, belongs to equity class 11 under the normalised chart of accounts but remains outside the legal perimeter of share capital.

Until further judicial clarity is obtained, it might be prudent to structure any contemplated distribution from share premium reserves or account 115 in concomitance with a formal share capital reduction or a share class redemption to mitigate WHT exposure, including in scenarios where distributions do not originate from current year profits or retained earnings. This holds true especially for distributions that benefit entities which are not covered by the Luxembourg domestic participation exemption regime or that cannot benefit from treaty relief (e.g. repayments of share premium from a Luxembourg holding company to certain investment funds).

Recently, a parliamentary question was submitted to the Luxembourg Government, enquiring specifically whether distributions from a share premium reserve should be subject to Luxembourg withholding tax. This initiative signals that the issue has attracted political attention and may pave the way for legislative clarification or intervention.