21 August 2025
How to use Share classes?
How to use share classes?
Use of share classes issued by a Luxembourg holding company
The Company is issuing one or several share classes to the investors.
Share classes are types of shares with distinct economic rights, often used in Luxembourg holding and fund structures to reflect different investor preferences, rights or asset strategies.
Typically:
1/ Each class participates in specific investments or assets. (tracking shares)
2/ Classes have different entitlement to distributions, liquidation proceeds, or voting rights. (alphabet shares)
Common in Private Equity, Real Estate, and Wealth Planning structures to separate returns and risks between investors.
Rationale:
Offers flexibility, customized profit allocation, and easier capital return mechanisms.???
The Historical Tax Uncertainty
The Problem for Promoters and Investors:
When a class of shares is fully redeemed, the question arises:
? Is the payment to the shareholder a dividend (subject to 15% withholding tax)?
? Or a capital gain (no withholding tax and tax-neutral at the company level)?
The risks:
Tax authorities could requalify the redemption as a dividend, especially in cases lacking clear economic substance or legal separation between classes.
This led to legal uncertainty and structuring hesitation in M&A and fund exits.
Case Reference
Administrative Court Ruling No. 39199 (2014): Redemption of preferred shares requalified as a dividend due to lack of sufficient economic differentiation from ordinary shares.
New Legislative Framework (applicable from 1st of January 2025)
New solution for structuring:
A full redemption of a share class will not be treated as a dividend — but rather as a partial liquidation, if all of the following conditions are met:
- The articles of association explicitly provide for different classes with distinct rights.
- The economic and legal rights of the redeemed class are effectively terminated upon redemption.
- The redemption price reflects fair market value of the underlying class assets.
- The class is fully cancelled (destroyed) within 6 months following redemption.
- The redemption is not disguised dividend distribution or abusive in nature.
Outcome of this new measure :
Eliminates tax ambiguity confirming that no withholding tax would apply
Promotes legal certainty and flexibility for Luxembourg structuring.
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