Tax assessments in Luxembourg

Article

Tax assessments in Luxembourg

Luxembourg’s pre-litigation and litigation procedural aspects for corporate taxpayers

Authors: Xavier Sotillos Jaime, Mariana Cohen Margiotta

In recent years, Luxembourg has recorded a continued increase in the number of claims filed by corporate taxpayers with respect to direct tax decisions[1]. This trend calls for attention to be brought to the key procedural aspects that govern these claims, as knowledge of these aspects is fundamental to ensure the admissibility and timely handling of a claim by the Luxembourg Tax Authorities (LTA) and Administrative Courts during the pre-litigation and litigation phase, respectively.

The objective of this article is to provide a brief overview of the key elements of the procedural framework for contesting decisions issued by the LTA, as applicable to corporate income tax, municipal business tax and net wealth tax.
 

Legislative framework

The legal basis for Luxembourg’s procedural framework as regards direct tax matters is set through:

  • The General Tax Law of 22 May 1931 as amended (Abgabenordnung, AO)
  • The Luxembourg Income Tax Law of 4 December 1967 as amended (LITL)
  • The Law of 7 November 1996 on organization of Administrative Courts, as amended
  • The Law of 21 June 1999 regulating the procedure in front of Administrative Courts, as amended

The procedural framework may be complemented or amended by bills passed affecting direct taxation as well as by Grand-ducal Government Council and Ministerial Regulations and Orders, where applicable.

In addition to the above, it is the practice of Luxembourg Direct Tax Authorities, when deemed relevant, to issue administrative circulars or notes providing their interpretation of aspects contained in the local tax laws. This interpretation serves as additional guidance on tax aspects for taxpayers.
 

The declarative tax system

Corporate direct tax matters encompass corporate income tax, municipal business tax and net wealth tax obligations. These obligations are formalized through the filing of corporate tax returns following the end of each fiscal year.

For corporate taxes, the filed tax returns shall serve as a basis for determining the taxable basis of the taxpayer. The tax returns shall include the amount of income, together with all other information necessary to determine the amount of taxes to be paid.

The assessment of such tax returns by the LTA is then the first step in determining the amount of tax payable on income, on wealth or municipal business tax. This assessment is carried out by the Tax Office section (bureaux d'imposition) of the LTA.
 

The assessment of tax returns

Tax assessments are in principle issued automatically by the Tax Office of the LTA based solely on the information provided by the taxpayer in its tax returns. The timing for the issuance of this assessment would generally be 30 days following the filing process.

A five-year limitation period applies for the LTA to assess, modify, collect and, if necessary, enforce direct taxes. Therefore, the Tax Office may revisit the automated tax assessment during this so-called statute of limitations period before reaching a final assessment.

Within its responsibility of examining the tax returns, the Tax Office has the power to request the taxpayer to provide information and additional proof to support the accuracy and correctness of the information included in the tax return, including transactions between related parties.

Should the Tax Office intend to disagree with the filed tax return, they are obliged to notify the taxpayer of significant deviations, to allow for his observations or additional clarifications, before issuing their assessment. The taxpayer has the obligation to collaborate with the LTA

The timeframe for the taxpayer to provide these observations is not explicitly stated under the current legislative framework. In practice, this period is rather limited i.e.no longer than two or three weeks. Therefore, in general, the assessment issued by LTA closely follows the notification of their intent to disagree with the filed tax return.
 

Inspections by the LTA: Service de révision and tax audits on site

The Tax Office inspector has the power to conduct a tax audit on site or instruct the Service de révision to do so. The specific competences of the Service de révision include the periodic evaluation of accounts and other accounting documents of taxpayers subject to review, the preparation of audit reports proposing the result for the tax positions assessed.

Burden of proof

The burden of proof falls on the taxpayer to justify and evidence items reducing the tax base and/or facts that should release him from a tax obligation. On the other hand, the LTA needs to provide sufficient warrant of facts increasing tax liability.

This allocation of the burden of proof highlights the need for taxpayers to have supporting files for its tax return positions, in line with requirements set forth in Luxembourg’s legislative framework: comparable tax test for Luxembourg’s participation exemption regime, transfer pricing documentation for related party transactions and evidence related to Controlled Foreign Company’s (CFC) functions, risks, taxation and payment, are just some of the supporting files that the taxpayer should have available to submit to the LTA upon request.
 

Contesting a decision issued by the LTA

Following the above procedures, clarifications and confirmations, the LTA issues a (rectified) tax assessment for the concerned fiscal year(s). it is then at this stage of the process that the majority of litigation cases in the context of direct taxes arise, as they relate to (rectified) tax assessments issued by the LTA and subsequently challenged by taxpayers.
 

Administrative (pre-litigation) phase

When contesting a decision issued by the LTA, Luxembourg’s current legislative framework sets forth different routes, the choice of which will ultimately depend on i) the taxpayer’s understanding of the grounds for its claim ii) the nature of the decision that is being contested and iii) the administrative rights that the taxpayer wishes to have available in case of a negative (or absence of a) decision by the LTA. It is important to note that he Tax Office inspector handling the file can continue to be contacted for additional clarifications, even after the tax assessment has been issued.

The timeframe for the taxpayer to file its claim corresponds to a three-month period that starts with the reception of the (rectified) tax assessment. The only exception being claims filed (recours gracieux), for which the filing deadline corresponds to the end of the year following the year of events relating to the claim.

When the claim of the taxpayer relates to simple mistakes, calculation errors and similar obvious inaccuracies that the taxpayer has identified after receiving the tax assessment, the taxpayer can then file a correction request. In this case, the three- month period covers both the claim and the response to be received from the LTA, therefore, timing of the filing should also consider the review process to be carried out by the Tax Office.

Where the taxpayer does not wish to contest the legal aspects of the LTAs decision but rather that the collection of taxes arising from said decision would cause a policy incompatible with equity and fairness, the taxpayer can file an informal appeal (recours gracieux) before the Director of the LTA.

When it comes to contesting the legal matters linked to the decision issued by the LTA, the taxpayer can request a change or modification of the assessment. This claim is directly made to the Tax Office section of the LTA. However, in the absence of a response from the Tax Office, such a claim does not give a right to go to the Administrative Courts and trigger the litigation phase of the claim. In practice, these types of claims are filed directly before the Director of the Direct Tax Authority, as elaborated below.

Taxpayers can file an objection against the decision before the Director of the Direct Tax Authority. The decisions correspond to formal and non-formal tax bulletins, such as withholding tax bulletins, tax assessments and individual administrative decisions such as tax credit bulletins and simple tax evasion fines.

Any other decision, which is not listed above, should be challenged using a hierarchical claim (recours hiérarchique). In general, these decisions relate to discretionary decisions of the LTA. Therefore, tax assessments do not fall within the scope of this section. Processes linked or arising from tax assessments, such as requesting a suspension of payment of taxes due and fixing supplement of taxes, can therefore be contested through a hierarchical claim.
 

Payment of taxes due

Luxembourg’s procedural framework does not contemplate a payment suspension on account of a claim being filed by the taxpayer. Therefore, taxes due become payable in the month following the (rectified) assessment issued by the LTA. In other words, while, in principle, a timeframe of three months is available to taxpayers to contest the decisions issued by the LTA, during the first month of this period taxpayers are obliged to fulfil the obligation of payment of taxes due.

The taxpayer has the possibility to request suspension of execution of the payment from the LTA. In such a case, the taxpayer should be in a position to provide its motivation in connection with the claim and even to file the claim prior to requesting a payment suspension with respect to an issued tax assessment (filing of the claim within a few weeks and not within the three-month period).
 

Litigation phase: the Administrative Courts

After an issued decision by the LTA or in the absence of a response within six months, the taxpayer can file a judicial claim before the Administrative Tribunal[2].  Therefore, filing an objection before the Director of the LTA is a mandatory preliminary step before filing an appeal before the administrative courts

The Administrative Tribunal is the first instance before which the taxpayer can present its claim. The judgement rendered by the Administrative Tribunal may then be the subject of an appeal to the Administrative Court, requested by either party to the dispute i.e., the taxpayer or the LTA.

The above outline of Luxembourg’s procedural framework regarding direct corporate tax matters allows to conclude that, Luxembourg taxpayers would be wise to discern that timing is of essence when addressing requests and tax review processes initiated by the LTA.

 

[1] Luxembourg’s Ministry of Finance Activity Report 2019

[2] Article 8(3), Administrative Law 1996)

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