Contributed By GSK Stockmann SA
Most tax controversies arise as a result of tax assessments or reassessments.
Besides the traditional issues resulting from taxpayers challenging tax assessment notices, tax litigation in Luxembourg recently saw an increase in cases arising from exchange of information queries from foreign tax administrations. Since the Berlioz case (C 682-15) and the subsequent change of the Luxembourg tax law, the Luxembourg tax administration (LTA) has to verify the purpose and relevance of the inquiry (eg, no fishing expedition). As a result, significant files have been brought forward to the courts to assess the relevance of the exchange of information requests.
Next to the aforementioned cases, the most common cases on direct taxes refer to the application of Luxembourg anti-abuse provisions (abus de droit), which are more frequently used by the LTA to challenge a taxpayer’s position. In this field, topics such as hidden dividend distributions and manager/directors’ joint and several liability for the payment of taxes constitute the main areas of tax disputes.
Other common issues are requests for an exceptional remission of tax debt, domestic participation exemptions, fiscal unity, treaty benefits or interpretations and ex-officio taxation.
Luxembourg tax disputes mostly involve personal income taxes (generally with regard to deduction of expenses/costs and requests for exceptional remittance), dividend withholding tax and corporate income taxes.
Tax disputes may be mitigated by entering into advance tax agreements (ATAs) or advance pricing agreements (APAs) with the Luxembourg direct tax authorities (contrary to other European countries, the Luxembourg VAT authorities do not issue ATAs). ATAs or APAs may provide for legal certainty by determining the future tax liability of taxpayers.
In 2015, Luxembourg introduced a legislative framework for the tax ruling procedure. Each request for a tax ruling is processed by a committee composed of between four to six tax civil servants. The committee provides a final binding answer within a timeframe of generally two to three months after the payment of an administrative fee ranging between EUR3,000 and EUR10,000 (depending on the complexity of the file). Rulings are binding for a period of five years.
However, as a result of the Luxleaks and other scandals (Panama papers, Openlux, etc) over the past years, the number of rulings filed has significantly decreased, with only 95 APAs/ATAs filed in 2019. That number dropped even further to 75 in 2020. This is a general downward trend that continues to be confirmed year after year.
There has been a steady increase in tax litigation over the last ten years (up almost 100% between 2011 and 2019 according to the LTA in its 2020 annual report). This trend looks to continue with the new provisions and tools available to the administration to combat harmful tax practices and tax avoidance schemes, and a potential increase in reassessments following an audit. Further, the drop in the filing of ATAs/APAs provides for less fiscal certainty and will de facto lead to increased tax controversies.
With regard to the BEPS recommendations to combat tax avoidance, it should be noted that Luxembourg implemented several EU directives which will have a direct impact on the amount of the tax disputes.
Anti-Tax Avoidance Directive
From the authors' point of view, the implementation of the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD 1), introducing, inter alia, interest limitation and general anti-abuse rules as of 1 January 2019, and the Anti-Tax Avoidance Directive (EU) 2017/952 (ATAD 2), as regards hybrid mismatches with third countries as of 1 January 2020, should lead to an increase in the number of tax disputes in Luxembourg. Especially, although covered by circulars issued by the LTA, concerning new topics such as the interest deduction limitation rule or CFC rules will most certainly lead to deviating interpretations between the LTA and the taxpayers.
The implementation of Council Directive (EU) 2018/822 on mandatory disclosure rules (DAC6) into Luxembourg law, as of 25 March 2020, created great uncertainty among practitioners and taxpayers due to its broad, although vague, scope (especially as to the interpretation of the hallmarks). The LTA has issued a circular (the latest version dated 12 February 2021) in order to clarify certain aspects of DAC6. It is, however, not detailed enough and clarifies only a few items, with many remaining in need of the same level of clarification. As with the exchange of information, it is expected that tax litigations will rise in relation to this matter.
The late filing of tax returns can be subject to a penalty of 10% of the tax due and a fine of up to EUR25,000. In practice, for the first offence, the fine is usually of EUR800 for individuals and EUR1,200 for companies, respectively.
In the event of a challenge of a tax assessment issued by the LTA, the lodging of a claim does not suspend the obligation to pay the taxes due. Also, the late payment of taxes triggers an automatic default interest of 0.6% per month, so that it is usually recommended (when possible) to pay the taxes due upfront, even where the tax assessment is challenged.
Luxembourg law does not, however, impose a preliminary payment or guarantee as a prerequisite to file a claim.
Luxembourg companies are audited on a discretionary basis. However, in recent years, tax audits have been initiated by the Luxembourg tax authorities due to the exchange of information procedure implemented by the respective Directives on Administrative Cooperation (DAC). Also, companies held by individual tax residents are usually under scrutiny by the LTA.
Tax audits may be freely initiated by the LTA if considered necessary. For companies, tax audits often arise, in practice, from the absence, delay or wrongful preparation of account books or tax returns. Once initiated, the Luxembourg law does not provide for any specific deadline with regard to the duration of a tax audit.
In the case of direct taxes, the limitation period of the tax audit is five years, starting from the end of the fiscal year in which the tax claim arose.
In the case of concealment, with or without fraudulent intent, the limitation period is extended to ten years.
The powers of the LTA are broad when it comes to tax audits. The LTA has the right and obligation to request information from taxpayers directly.
Tax audits may be performed remotely by requesting specific documents from taxpayers or on-site (which is the preferred route). Luxembourg taxpayers have to provide the requested information in a timely manner. If they do not, the LTA may make its request to any third parties which are likely to hold the relevant information.
The LTA may also proceed to “on-site” inspections of taxpayers' premises. As a general principle, such “on-site” inspections should occur every three years for large companies. Alongside these “scheduled” inspections, the LTA may perform special “on-site” inspections for taxpayers which are considered “high risk”.
Documents requested by the tax authorities may be given in person or sent by mail.
In principle, the general tax position of a taxpayer is being scrutinised.
Furthermore, Luxembourg being a global hub for international investments, most transactions bear a cross-border factor. As such, some of the main areas for civil servants are the potential existence of permanent establishments, potential hidden dividend distributions and the deductibility of operating costs. Given the high number of intra-group financings conducted via Luxembourg companies, compliance with the transfer pricing rules is another key area which triggers the attention of the Luxembourg tax authorities.
Since the court ruling from the European Court of Justice in relation to the Danish UBO cases, a focus has been placed on the substance requirements of Luxembourg companies acting as “conduits” within international structures.
Within the framework of the DACs, Luxembourg has exchanged an average of 450,000 files with foreign tax administrations over the last few years, and received in return approximately 100,000 foreign reports.
The automatic exchange of tax information, and in particular the Common Reporting Standard (CRS), led to an increase of tax audits initiated by the LTA.
In the course of a tax audit, it is important to assess the background and purpose of the audit. This preliminary assessment phase is relevant in order to provide the appropriate and correct information to the tax authorities.
Although not mandatory, it is recommended that a tax adviser assists in order to streamline the communication with the LTA. The tax adviser may schedule a meeting with the civil servant in charge of the tax audit and negotiate a settlement.
Although direct taxes and indirect taxes are supervised by two segregated tax administrations, the administrative claim phase is now harmonised between the two public bodies.
Pursuant to paragraph 228 of the Luxembourg general tax law (LGTL), Luxembourg taxpayers may file an administrative claim against their tax assessments issued by the LTA within three months from the notification of the tax assessment. The receipt of the notification is assumed to have occurred three business days after its issuance by the LTA. Such claim is to be directly addressed to the director (préposé) of the competent tax office and be motivated by sound reasons.
Taxpayers may also address a claim to the direct tax authorities, as per paragraph 94 of the LGTL, regarding a specific matter. The filing of an administrative claim on the basis of paragraph 94 of the LGTL does not, contrary to the filing on the grounds of Paragraph 228 of the LGTL, grant the taxpayer the right to initiate a judicial litigation in the absence of an answer of the director of the competent tax office.
If the director of the competent tax office rejects the administrative claim, the taxpayer may file a judicial claim within three months from the notification of the rejection.
Article 76 (3) of the Luxembourg VAT law provides for the right to file a claim also within three months from receipt of the VAT assessment notice. If the VAT office rejects the administrative claim, the claim is automatically redirected to the director of the indirect tax authority.
If the administrative claim is rejected by the director of the VAT administration, the taxpayer may file a judicial claim in front of civil courts, also within three months from the notification of the rejection.
In Luxembourg, claims regarding direct taxes or indirect taxes are not lodged in front of the same jurisdictions. In both cases, however, the director of the relevant tax administration is not compelled by law to respond within a specific maximum timeframe.
If the director of the direct tax administration does not respond within six months from the filing of the administrative claim, the taxpayer is entitled to assume that the absence of answer is equivalent to a negative decision. The taxpayer may then initiate a judicial claim before the Luxembourg Administrative Tribunal. There is no specific deadline for the filing of the judicial claim if the administrative claim remains unanswered.
If the administrative claim remains unanswered six months after the filing of such claim, the taxpayer may file a judicial claim in front of the District Court. No specific deadline applies.
For Luxembourg tax purposes, the judicial phase is considered a second level of jurisdiction. Indeed, in order to be able to initiate the judicial phase, the taxpayer must first have had a claim rejected in the administrative phase, by the relevant tax authorities.
For direct tax purposes only, judicial claims must be filed with the Administrative Tribunal. As a general rule, litigation procedures before the administrative courts must, in principle, be initiated by a Luxembourg lawyer.
However, for procedures relating to direct taxes, no specific formalities are required with regard to the representation of the litigants or the filing of the initiating of the litigation procedure. In other words, the taxpayer can represent itself or be represented by a tax adviser, who does not need to be a qualified lawyer.
Luxembourg civil courts are competent for the judicial litigations in relation to VAT and other indirect taxes. Conversely to direct tax procedures before Luxembourg administrative courts, indirect tax procedures brought before civil courts must be initiated by the filing of a writ of summons by a Luxembourg lawyer. The writ of summons must be notified to the counterparty by a bailiff in a timely manner.
After the filing of the judicial claim, the registry of the Administrative Court shall forward the judicial claim to the competent tax office.
The procedure before the Administrative Court begins with an exchange of arguments between the parties, which occurs in a limited number of briefs. The first brief occurs within a period of three months, and every subsequent brief occurs within a period of one month. After the exchange of the final subsequent briefs by each party, the Tribunal fixes oral hearings.
The decision of the Administrative Tribunal should occur approximately one year following the initiation of the judicial tax litigation.
In indirect tax court proceedings, the dates for the exchange of briefs and the oral hearing(s) are set by the District Court. The decision of the District Court should occur approximately two years after the filing of the claim.
As the Luxembourg judicial tax procedure is written and based on the adversarial principle, the provision and use of written evidence is essential.
Although uncommon, taxpayers and the tax administration may request witness evidence from a third party to consolidate their case. Where the tax administration requires a third party to act as a witness during the procedure, a party may only refuse under specific conditions (eg, family member or professional secrecy obligations).
Pursuant to the LGTL, witnesses may only provide the relevant information in writing. In cases where written evidence would not suffice in the making of a decision, the court may request an expert witness in order to verify certain open points (eg, valuation of real estate asset).
Under Luxembourg law, as a general principle, the burden of proof lies with the party who claims for the execution of an obligation.
With regard to tax matters, this means that the burden of proof rests with the taxpayer where it claims a reduction in taxable income. If the LTA's assessment results in an increase in the taxpayer’s taxable income, the burden of proof lies with the LTA.
However, within judicial procedures relating to direct tax matters, the burden of proof is borne by the direct tax authorities.
The strategic options which are to be considered in the course of judicial tax litigations should be determined and monitored on a case-by-case basis.
Although not a source of law, Luxembourg tax case law has considerable authority. Furthermore, since most of the Luxembourg legal texts are of foreign origin, practitioners attach great importance to the study of foreign case law. More specifically, Luxembourg tax law has been strongly influenced by German tax law as a result of the German occupation during WWII. As a result, Luxembourg case law often refers to German court decisions in tax matters and follows the same views.
With regard to transfer pricing rules, the Luxembourg income tax law (LITL) expressly refers to the OECD transfer pricing guidelines, as an official source of interpretation. Similarly, the LITL also refers to the EU directives and OECD BEPS reports when it comes to the interpretation of hybrid mismatches or CFC rules.
Last but not least, ECJ decisions are also used as an official source of interpretation for domestic courts.
Following the decision of the Administrative Tribunal or the District Court, taxpayers may file an appeal within a period of 40 days following the notification of the decision of the lower courts. While the decisions of the Administrative Tribunal may be challenged before the Administrative Court, appeals against the decisions of the District Court may be filed before the Court of Appeal with the necessary intervention of a bailiff.
Based on unofficial sources (annual Meetincs conferences, speaker Mr Georges Simon), taxpayers have a higher chance of success (even if only partially) in front of higher courts in contrast to proceedings held in front of lower courts.
From the perspective of the LTA, except in "cases of principle", it generally accepts the decisions rendered by the lower courts.
Decisions of the Administrative Court of Appeal are not subject to a pourvoi en cassation. However, taxpayers may submit a pourvoi en cassation in front of the Court of Cassationagainst decisions of the Civil Court of Appeal.
For direct tax matters, the tax appeal procedure is identical to the procedure before the Administrative Tribunal. There is a wide range of arguments that can be raised during the tax appeal procedure.
The brief of the defendant must be filed with the registry of the Administrative Court of Appeal who communicates the claim to the parties within one month. The claimant may reply to the first brief within a month. The same deadline applies to the defendant following the notification of the first brief of the claimant.
The stages of the indirect tax appeal procedure before the Civil Court of Appeal are identical to the procedure applicable before the District Courts.
The Administrative Court of Appeal is composed of five judges and contains one unique panel of three judges.
The Civil Court of Appeal has a specific chamber for tax-related matters composed of three professional magistrates, being a president and two counsels.
The Court of Cassation is composed of one president and four permanent counsels. When the Court of Cassation overturns the decision of the Civil Court of Appeal, the case is sent back before the same Court of Appeal that ruled in the first case.
Luxembourg implemented the EU Directive on tax dispute resolution mechanisms on 20 December 2019. The mutual agreement procedure applies to any disputes relating to Luxembourg income tax, withholding tax, municipal business tax and wealth tax for all financial years following 2018.
EU-resident taxpayers can file claims to the competent authority (direct tax authorities in Luxembourg) relating to the EU Arbitration Convention and double tax treaties entered into between member states.
Taxpayers may file a claim with the competent tax authority within three years from the notification of the tax assessment.
Upon the filing of a claim, if the competent tax authority does not answer the case within six months from the filing, the claim may be resolved via the mutual agreement procedure within two years from the filing. The dispute is resolved by a commission composed of a judge assisted by independent persons and on the other side competent tax officials. The commission shall provide a resolution within a fixed period of six months. The resolution of the commission is binding for the tax authorities.
The mutual agreement procedure may be initiated in parallel to the traditional judicial procedures.
Since 2003, it has been possible for any private person or company to reach out to the Luxembourg Ombudsman (either by written request or even orally) to file a claim against the Luxembourg tax administrations. This is especially the case when the taxpayer considers itself unfairly treated by the LTAs or when the administration acted in breach of its public mission.
For the years 2019 and 2020, the Ombudsman intervened in approximately 55 and 35 cases, respectively, for direct tax matters.
Remittance of Taxes
The director of direct taxes is empowered to grant a total or partial remission of taxes whose collection would be unfair, considering the particularity of the situation in which the taxpayer finds itself (objective or subjective severity). Situations must be assessed on a case-by-case basis.
There are two kinds of fairness:
The application for a remission of taxes does not challenge the legality of the tax assessment, but merely invokes considerations of equity. A challenge on the content of the tax assessment itself falls under litigation proceedings.
See 1.3 Avoidance of Tax Controversies.
See 1.3 Avoidance of Tax Controversies.
See 6.2 Settlement of Tax Disputes by Means of ADR.
See 6.2 Settlement of Tax Disputes by Means of ADR.
Administrative Tax Offences
The LTA may issue additional tax assessments in cases where the taxpayer did not comply with the applicable legal obligations (eg, absence or late filing of tax returns). In such cases, the LTA may impose either lump sum fines or apply interests on the due amount. The LTA may also impose administrative fines for non-criminal infringements of the tax law.
Where a taxpayer inadvertently reduced its taxable basis, it may be subject to a fine of up to EUR25,000. An infringement against the fiscal system may be subject to a fine of up to EUR2,500, even if the taxpayer did not trigger any benefit from such infringement.
Criminal Tax Offences
Since 2017, tax fraud and aggravated tax fraud have been considered as primary offences for anti-money laundering purposes. Provided that the conditions for the qualification of a criminal tax offence (eg, tax fraud or tax swindling) are met, such criminal offence may be subject to a fine ranging between EUR25,000 and ten times the amount of the avoided taxes.
In criminal proceedings, a taxpayer may only be sentenced for tax fraud if it has been proved that the taxes avoided were effectively due. The relationship between the administrative and criminal procedure is marked by the necessity to determine whether the taxpayer was subject to fiscal obligations. A criminal judge within a tax offence procedure must first wait for the decision of the administrative judge determining whether the defrauded taxes were due or not.
If the LTA suspects that a taxpayer has committed a tax-related offence, it may initiate a criminal tax procedure by transmitting the file to the public prosecutor. After the transmission, the public prosecutor conducts an investigation.
See 4.2 Procedure of Judicial Tax Litigation.
Under the LITL, there is no reduction of potential fines if the taxpayer proceeds with an upfront payment of the additional tax assessment. Late payment of taxes due is subject to a late payment interest of 0.6% per month.
On a case-by-case basis, and upon circumstanced requests only, the director of the relevant tax administrations may decide to increase or reduce a fine.
Under Luxembourg law, taxpayers involved in a criminal tax trial may not benefit from any plea bargain by entering into an agreement with the public prosecutor in order to stop or prevent such trial.
Either the taxpayer or the public prosecutor may file an appeal before the Court of Appeal against a decision of the Criminal Court related to a criminal tax offence. The deadline for the filing of the appeal ends 40 days following the notification of the decision of the Criminal Court.
As a result of an audit or a reassessment notice, the LTA may transfer the case to another authority (judicial authority, public prosecutor, etc). In 2020, the direct tax administration transmitted 156 cases to the relevant public bodies in the framework of inter-administrative and judicial co-operation.
With regard to tax litigations, there has been an increase of case laws referring to artificial cross-border transactions challenged by the LTA under the general anti-abuse rules (GAAR). However, the Luxembourg tax courts have set boundaries and more detailed rules for determining whether a transaction is artificial.
Recently, the Administrative Tribunal issued a decision in relation to an exchange of information request of the Belgian tax authorities, which was motivated by the infringement of the GAAR by a cross-border structure using a Luxembourg “conduit” company. It is to be expected that the GAAR will give rise to additional administrative litigation (though rarely to criminal offences).
In the case where a tax assessment or tax adjustment triggers a double taxation, it is common to initiate a domestic litigation procedure and the mutual agreement procedure mechanism under the applicable double tax treaty.
Since the amendment of the domestic GAAR through the implementation of ATAD 1, Luxembourg tax authorities should not ignore any misuse of forms and institutions of law (ie, an arrangement) which has been carried out primarily for achieving a tax advantage and which is not commercially genuine. An arrangement is considered as "not genuine" if it has not been put into place for valid commercial reasons which reflect economic reality. The GAAR may apply to cross-border situations covered by double tax treaties.
The rationale behind the principal purpose test (PPT) lies in denying the benefit of a double tax treaty to a taxpayer if such benefit was one of the main motivations to enter into an arrangement. Luxembourg opted for the discretionary relief clause providing taxpayers the ability to request the LTA grant a treaty benefit if such benefit would have been granted to the taxpayer in the absence of the concerned arrangement.
The denial of a treaty benefit on the grounds of the PPT should be analysed by the LTA on a case-by-case basis. It should be noted that the PPT applies in parallel to the GAAR and, hence, adds an additional layer of complexity with regard to the application of anti-abuse rules.
It is expected that the interpretation of the PPT will trigger additional litigation matters in Luxembourg.
Luxembourg embedded the arm's-length principle, deriving from Article 9 of the OECD Model Convention, in Articles 56 and 56 bis of the LITL. Moreover, the mentioned articles reflect the spirit set out in BEPS Actions 8–10, such as the concept of comparability analysis and a general anti-abuse rule that allows the LTA to disregard a transaction that has been made without any valid commercial or business justification.
The LTA issued Circular No 56/1-56 bis/1 on 27 December 2016, which provides further guidance with regard to substance and transfer pricing requirements in line with the OECD Guidelines. As a result, international transfer pricing adjustments can, from a Luxembourg standpoint, be challenged under domestic tax courts if not compliant with the OECD transfer pricing guidelines.
While APAs traditionally constituted a good mechanism for mitigating transfer pricing matters, since the Luxleaks affair, the committee in charge of the advance pricing agreements procedure, as mentioned in 1.3 Avoidance of Tax Controversies, has adopted more restrictive conditions for granting APAs to taxpayers. It is estimated that only one in four APA requests is agreed on by the ruling committee.
Given that Luxembourg companies are often used for international tax structuring purposes, cross-border dividend and interest payments between associated enterprises are a focus of the LTA.
In view of the recent amendments to Luxembourg domestic law made in order to comply with the latest OECD BEPS guidelines (eg, GAAR and PPT), both withholding tax and transfer pricing issues trigger, or will trigger in the near future, additional litigation in Luxembourg.
Further, given that Luxembourg shares its borders with four countries and has a large number of cross-border workers from France, Germany and Belgium, arbitration for the taxation of teleworkers applies frequently with these respective countries. This topic was heavily discussed and negotiated with the foreign tax administrations and relevant ministries at the beginning of the COVID-19 pandemic due to multiple lockdowns and official work-from-home recommendations for cross-border commuters.
Within the framework of the introduction of the MLI on 1 August 2019 in domestic law, Luxembourg has been guided in its choices by a policy of prudence, opting, on the one hand, for provisions that are in line with its current treaty policy and, on the other hand, for provisions introducing minimum standards that are mandatory but can be adopted in a flexible manner.
As for the mandatory provisions, Luxembourg has chosen the options that best suit its contractual policy.
For arbitration matters, Luxembourg opted for the mandatory binding arbitration rule in Article 19 of the Luxembourg MLI law.
Such mandatory binding arbitration rule states that in cases of arbitration procedure initiated on the basis of the mutual agreement procedure provided for by the respective double tax treaties, if the taxpayer considers that the decision resulting from such procedure may not be in line with the applicable laws, or the case has not been resolved within a period of two years, such case should be deferred to an impartial arbitration panel upon the request of the relevant taxpayer.
There are currently no provisions under DTTs or the MLI law which limit or restrict factually the access to arbitration for tax disputes.
Pursuant to Article 23 (1) of the MLI law, Luxembourg opted for the baseball arbitration procedure.
Although the reason behind choosing the baseball procedure was not explicitly mentioned in the draft bill, it can be assumed that this choice was motivated by the desire to promote quick outcomes for arbitration cases by reducing time and costs compared to the independent opinion procedure. The baseball procedure is consistent with the existing options under DTTs and the Arbitration Convention.
Luxembourg, being an EU member state, followed the trends in international tax arbitration made by the OECD by introducing in its domestic law on 20 December 2019 Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms.
At present, there is no publicly available information with regard to the use of the recent legal instruments for tax dispute resolutions.
As per Article 18 (2) of the MLI, the LTA may publish, via the European Commission, an anonymised summary of its decisions mentioning the legal issue, the facts, the date, the relevant fiscal years, the legal basis, the business sector and the final decision.
However, the LTA and, if applicable, the foreign tax authorities may publish the entire decision with the consent of the relevant taxpayer. Before the publication of the decision, the LTA must notify the relevant taxpayer. Upon receipt of the notification, the taxpayer has then 60 days to request the LTA not to publish any information relating to a commercial, industrial or professional secret, or a commercial procedure, or which would be contrary to the public order.
Under the MLI law, there are no obligations to publish the decisions taken by the arbitration commission.
While the tax dispute resolution mechanism under the MAP Directive applies exclusively to tax disputes deriving from the application of DTTs entered into between EU member states, the mechanism under the MLI applies to issues arising from the application or interpretation of DTTs entered into by states that opted for the same options under the MLI. Thus, the choice of the mechanism is determined on a case-by-case basis.
Regarding double tax disputes involving the EU member states that implemented the MLI, taxpayers may choose between a procedure under the MLI or the MAP.
Given that tax disputes arising in Luxembourg usually involve foreign investors or shareholders, corporate taxpayers generally involve their local tax adviser in order to initiate and co-ordinate the international tax arbitration procedure.
In administrative litigation proceedings relating to direct tax claims, taxpayers are not obliged to act through a bailiff in order to file a claim or an appeal before the Administrative Tribunal or the Administrative Court of Appeal. Accordingly, the costs arising from such administrative direct tax procedures remain low.
Conversely to administrative tax procedures, judicial claims relating to indirect taxes must be initiated by means of a writ of summons filed by a Luxembourg lawyer and notified to the counterparty by a bailiff. Taxpayers must be represented by a Luxembourg lawyer in front of the judicial court, which triggers further fees. Payable amounts imposed by the courts are due upon the notification of their decision. The courts may require that one of the parties pays a guarantee in advance of the decision.
The Luxembourg civil procedure law provides that certain costs arising from the judicial procedure may be attributed to one of the parties of the procedure. In practice, the procedure costs are borne by the party that loses the case. Legal costs arising from the mandate of a lawyer may only be partially attributed to the unsuccessful party.
The Luxembourg law does not provide for any indemnities in the event where the court decides that the initial additional tax assessment issued by the LTA is void and null.
Under Luxembourg law, no court fees are due if a taxpayer opts to use any alternative dispute resolution mechanisms.
There are no official statistics regarding the number of pending tax court cases in Luxembourg.
Based on the annual reports from the direct tax administration, during 2019, the direct tax administration registered 1,635 claims filed by taxpayers against tax assessments. Approximately 251 direct tax claims resulted in the introduction of an administrative claim before the Administrative Tribunal. In 2020, the number of claims lodged dropped to 193, which is only due to the suspension of the deadlines as an extraordinary measure against the COVID-19 pandemic.
The tax administration stresses that the cases are increasingly complex and involved various issues relating to domestic and European topics, tax assessments, joint payment of taxes and exchange of information.
With regard to indirect taxes, the VAT administration registered 268 claims against VAT assessments and 912 claims against additional VAT assessments during 2019. During the same year, taxpayers assigned the VAT administration before the civil courts in 25 cases. According to the VAT administration’s statistics, in the vast majority of disputes between the taxpayer and the VAT administration, the courts essentially confirmed the VAT administration’s position.
In 2020, the VAT administration registered 998 claims, where 304 related to claims against a VAT assessment and 694 were claims against administrative penalties. Within the same year, 41 claims were lodged in front of the civil counts against decisions from the VAT administration.
Statistics regarding the outcome of litigation procedures are not published in Luxembourg.
Based on unofficial sources (annual Meetincs conference, speaker Mr Georges Simon), for 2020, 38% of the Administrative Tribunal’s decisions were in favour of the taxpayer (either fully for 27% or partially for 11%), while 46% of the decisions were unfavourable to the taxpayer.
With regard to the higher courts, a total of 51% of the Administrative Court’s decisions were in favour of the taxpayer (with 18% fully and 33% partially), while 49% of the decisions were unfavourable to the taxpayer.
When it comes to procedural matters, meeting the deadlines provided by the law remains one of the main considerations. Luxembourg being a global hub for international investments, investors are usually residing in foreign jurisdictions.
Given that the claims and the writs of summons must be sent via registered mail or bailiff to the respective courts or counterparties, postal delays should be taken into consideration for the meeting of deadlines. However, litigants residing in foreign jurisdictions may appoint local legal counsel in order to co-ordinate the litigation procedure.
Further, given the large number of international groups using Luxembourg companies as a gateway to Europe, tax litigation procedures usually involve cross-border cash flows between linked entities residing in different jurisdictions. Such cases result in international tax issues which require a close monitoring and co-ordination between the involved entities and their respective legal counsels.