Lower Administrative Court | Advance Tax Agreements Binding on Tax Administration

In a judgment of 28 January 2020, the Luxembourg lower administrative court (Tribunal administratif) held once again that advance tax agreements are binding upon the Luxembourg Tax Administration (“LTA”).

In February 2013, the taxpayer, a société anonyme incorporated under Luxembourg law (the “Company”), requested in writing an “advance tax agreement” regarding the tax treatment of Mandatory Redeemable Preference Shares (“MRPS”) which generated a preferred dividend for its sole shareholder representing 85% of the net capital gain booked over the real property owned by the Company.

The taxpayer requested confirmation that the MRPS would be characterised as debt and that payments under the MRPS would be tax deductible. In April 2013, the tax administration responded and expressed its agreement that the content of the Company’s request complied with the tax laws and administrative practices currently in force. Such agreement was valid for one year.

However, the tax authorities challenged the Company’s 2013 tax return and demanded proof that the return on the MRPS complied with the arm’s length principle. The Company responded that this proof was not necessary since the MRPS’ tax treatment had been agreed by the LTA in the advance tax agreement. The Director of the LTA disagreed. The case was thus referred to the lower administrative court.

First, the lower administrative court found that, at the time (2013), advance tax agreements were not subject to any particular legislative framework. Thus, the conditions and scope of such an advance tax agreement would need to be settled by reference to general principles of law, namely the principles of legitimate expectation and of legal certainty. The court concluded that pursuant to the principle of legal certainty, the tax administration was bound to honour promises or assurances it had given. As a reminder, in order to be binding on the LTA, the following conditions should be met:

• the taxpayer’s question must be in writing;
• the taxpayer’s request must be sufficiently clear and complete to allow the LTA to adequately analyse the taxpayer’s situation;
• the LTA’s answer must come from a duly authorised tax official, or an official who the taxpayer could legitimately expect to be duly authorised;
• the LTA must have had the intention of being bound by the information given to the taxpayer (i.e. the answer is provided free of restrictions or caveats); and
• the LTA’s answer must have had decisive influence on the taxpayer.

In the case at hand, the lower administrative court found that all the conditions were met. Interestingly, the court added that in the presence of an advance tax agreement which lawfully binds the LTA, the tax authority cannot characterise the same structure and operations as an abuse of law, even when the structure results in a reduced tax burden, since the LTA has accepted the reality and legality of the taxpayer’s actions. The LTA cannot ex post reverse its position by characterising the same arrangement as abusive. This judgement presents welcomed certainty and clarification on the binding effect of past advance tax agreements on the LTA as well as the limitation of abuse of law in this context.