On 28 March 2023, the Luxembourg government presented a draft law amending a number of aspects of the administrative procedure applicable in direct tax matters (the “Draft Law”). While the government has presented this reform as a simplification and modernisation of the procedures applicable to taxpayers, its contents in fact reveal increased complexity and hurdles for taxpayers.
First of all, the Draft Law unfortunately fails to conduct a comprehensive overhaul of the General Tax Law (the Abgbenordnung). The General Tax Law, first implemented in Luxembourg during the German occupation of World War II and maintained since then, currently contains provisions which have not been published in the Luxembourgish official journal or have not been adapted to the contemporary Luxembourgish legal order. The Draft Law once again misses the opportunity to address these issues.
Secondly, the Draft Law introduces new procedures and requirements in the field of transfer pricing as well as a number of requirements, which will effectively increase the burden on taxpayers seeking to successfully file an administrative or judicial appeal in direct tax matters, rolling back years of progress in taxpayers’ rights earned through litigation in front of administrative courts.
1. The formal requirements of an administrative appeal (réclamation)
The Draft law plans to introduce the following formal requirements for administrative appeals such as:
- The full name and address of the taxpayer;
- The designation of the decision against which the administrative appeal is directed;
- The object of the request;
- A short summary of the facts and arguments;
- Proof of the powers of representation (if applicable);
- The list of supporting documents on which the taxpayer will rely.
If one of these formal requirements is not met, the administrative claim will be declared inadmissible. These new requirements, if adopted, represent a significant step-back for taxpayer rights by increasing the likelihood that administrative appeals will be rejected on purely formalistic grounds. The effect being that taxpayers may then be time-barred from re-challenging the same tax assessment, if the notification of his rejected appeal on the grounds of formalistic issues takes place after the expiry of the three month deadline.
2. New 12 month deadline to file a judicial appeal
The Draft Law proposes to amend the General Tax Law to provide that the absence of a reply from the Director of the Luxembourg Tax Administration (“LTA”) should, after six months, be presumed to constitute a rejection of the administrative claim.
The Draft Law maintains the six-month deadline after which the taxpayer may file a judicial appeal (requête) in front of the Lower administrative court. However, the Draft law provides that the judicial appeal must now be filed within twelve months from the expiry of the six-month deadline or from the Director’s decision regarding the administrative appeal.
The effect of this measure is to relieve the tax administration from its obligation to reply to administrative claims, which it often fails to do in practice and has increasingly been sanctioned by the administrative courts through the award of procedural indemnities to taxpayers, while limiting taxpayers’ right to appeal by introducing a 12 month window to act which did not exist until now.
3. Late filing of annual accounts
According to the Draft Law, the LTA may disregard and consider as non-binding for tax purposes annual accounts filed by taxpayers after the statutory deadline. This would be in addition to the financial penalties and criminal penalties already in place for the late filing of financial accounts, and represents a disproportionate penalty on grounds that have already been rejected by the courts as unjustified in the past.
4. Requests for tax credit and expenses deductions
The Draft Law provides that requests for certain tax credits (single-parent tax credit, tax credit for investment, etc.) or deduction of extraordinary expenses must be made at the time of filing the tax returns. Contrary to current practice, the Director could no longer consider these requests, in the context of an administrative appeal if the request and supplementary documents were not part of the initial tax return. Thus increasing the complexity of filing tax returns and making certain mistakes, that could previously be rectified during the appeal process, definitive.
5. New restriction on appealing ex officio tax assessments
Under current law, the LTA may issue ex officio tax assessment when the taxpayer has not filed a tax return. The taxpayer may challenge the ex officio tax assessment by demonstrating that his real taxable result deviates significantly from the estimated tax base in the ex officio tax assessment. The Draft Law proposes to define the term “deviating significantly” as the difference between the taxpayer’s result as determined ex officio and his real taxable result exceeding 10%. This measure clearly lacks fairness as no reference to a nominal amount is provided in addition to the threshold.
6. New APA procedure and TP requirements
The Draft Law introduces a formal legal basis for bilateral or multilateral advance pricing procedures, as well as a draft grand ducal decree setting out the content of such a request. These requests must be made in writing to the Director of the LTA, and will be subject to a fee ranging between EUR 10.000 and EUR 20.000 depending on the complexity of the file.
In addition, the Draft Law and accompanying draft grand-ducal decree also set out in more detail the transfer pricing documentation requirements that taxpayers will have to prepare and make available to the LTA upon request. These requirements aim to bring Luxembourg law in line with the OECD recommendations and guidelines.
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