Principle of legitimate expectations once again confirmed by the Luxembourg Administrative Court

In a recent decision (No.40352 dated December 20^th 2018), the Lower Administrative Court (“Tribunal administratif”) confirmed, as in previous decisions, that by application of the principle of legitimate expectations (principe de confiance légitime), a confirmation given by the Luxembourg tax authorities remains applicable unless a change of law occurs or the taxpayer acted in bad faith.

In the present case, a Luxembourg company financed various investments through profit participating certificates (“Genussscheine”) and filed an advance tax agreement to confirm the nature for tax purposes of said certificates and their related tax treatment. The advance tax agreement was granted on March 18^th 2009 and confirmed that those certificates are to be treated as debt instruments for Luxembourg income tax and net wealth tax purposes. Thereafter, the taxpayer failed to file his 2011 net wealth tax return and the Luxembourg tax authorities thus had to proceed to an ex officio taxation of the net wealth tax. For this purpose, the Luxembourg tax authorities based their assessment solely on the annual accounts of the company, in which the certificates had been booked as equity. Since the tax balance sheet, where the tax treatment confirmed by the advance tax agreement should have been reflected and which should have been appended to the net wealth tax return, had not been filed by the taxpayer, the Luxembourg tax authorities treated the profit participating certificates as equity instruments and disallowed their deductibility for net wealth tax purposes. The question the Lower Administrative Court had to answer was thus in essence, whether the qualification retained for the profit participating certificates in the advance tax agreement should remain binding on the Luxembourg tax authorities by application of the principle of legitimate expectation, even in case of deficiency by the taxpayer to file his tax returns, leading to an ex officio taxation.

The Lower Administrative Court considered that, in line with constant case law, the principle of legitimate expectation is of the outmost importance and can only be rescinded by the Luxembourg tax authorities in very limited cases. Indeed, provided that the well-established four constitutive conditions for a legitimate expectation have been met, i.e. that (i) a written request has been filed by the taxpayer with the Luxembourg tax authorities, (ii) which includes all the relevant information and (iii) that the request has been validated without restrictions or reserves by a competent public official that is allowed to issue individual administrative decisions and (iv) that this request and the outcome thereof had a determining impact on the taxpayer’s affairs, such a legitimate expectation can only be rescinded in case of a subsequent change of law or of bad faith of the taxpayer. In this context the notion of bad faith has to be limited to situations where the taxpayer provided incomplete or inaccurate information, thus preventing the Luxembourg tax authorities from having full knowledge of the facts when granting the advance tax agreement. A failure by the taxpayer to file its tax return, which leads to an ex officio taxation, is not to be considered as bad faith given that it occurs after the granting of the advance tax agreement.