In a judgment of 15 June 2023, the Higher Administrative Court upheld a judgment of the Lower Administrative Court, which had annulled tax returns issued against a taxpayer on the grounds that the tax authorities had failed to respect the taxpayer's rights of defence arising from the adversarial principle. During the course of 2019, the taxpayer was subject to a joint audit by the Luxembourg Registration Duties, Estates and VAT Authority (Administration de l’enregistrement, des domaines et de la TVA) (“AEDT”) and the Luxembourg Tax Authorities (Administration des contributions directes) (“LTA”) relating to the tax years 2016 to 2018. Following the audit, the LTA issued a letter informing the taxpayer that they intended to reassess his income tax returns on the grounds that the margins declared by him cannot be correct because they were allegedly lower than the margins of restaurants comparable to his restaurant. Given that the LTA did not specify how they determined the margins of comparable restaurants, the taxpayer was unable to explain what differentiated him from the restaurants that have been taken into account by the LTA. As the taxpayer was unable to convince the LTA that its margins were correct, the LTA issued rectifying tax assessments in order to tax the taxpayer on the basis of the margins that are considered adequate by the LTA.
In its judgement of 28 September 2022, the Lower Administrative Court annulled the rectifying tax assessments on the grounds that compliance with the contradictory principle would have required the LTA to explain to the taxpayer how it had determined the allegedly usual margins in order to allow him to defend himself before the assessments were issued. In its appeal against the judgment of the Lower Administrative Court, the State tried to argue that the reference to "usual margins" was a misunderstanding and that in fact the reassessment was based on clearly established facts. However, the Higher Administrative Court rejected the State's argument and upheld the first instance judgment on the grounds that it was clear from the documents in the file that the basis for the reassessment was the usual margins, the details of which had not been communicated to the taxpayer prior to the issue of the tax slips and the details of which were also not in the file filed with the Court.
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