Tax Disputes

• The amended Law of 4 December 1967 on Income Tax;
• The General Tax Law of 22 May 1931, as modified;
• The amended Tax Adaptation Law of 16 October 1934;
• The amended Wealth Tax Law of 16 October 1934;
• The amended Law of 27 November 1933 relating to the collection of direct contributions, excise duties on brandy and social insurance contributions;
• The amended Law of 7 November 1996 on the organisation of the administrative courts;
• The amended Law of 1 June 1999 on the regulations governing proceedings before the administrative courts;
• The Law of 1 March 2019 amending the Law of 25 November 2014 on the procedure applicable to the exchange of information on request in tax matters; and
• The new Code of Civil Procedure.

• The First and Second EU Anti-tax Avoidance Directives;
• The Sixth EU Directive on Administrative Cooperation (DAC 6);
• EU Directive 2011/16/EU on information exchange in tax matters;
• EU Directive 2016/881 amending Directive 2011/16/EU on the mandatory automatic exchange of information in the field of taxation (country-by-country reporting);
• Double tax treaties to which Luxembourg is a signatory;
• The European Convention of Human Rights; and
• The Charter of Fundamental Rights of the European Union

• The Constitutional Court.
• The administrative order: This has competence to hear cases regarding the substance of the dispute:
• • The Administrative Tribunal is the first-instance administrative court; and
  • The Upper Administrative Court has jurisdiction over first-instance decisions of the Administrative Tribunal.
• The judicial order: This has competence to hear forced collection cases, as follows:
• • The district courts hear cases at first instance.
  • The Court of Appeal has jurisdiction over first-instance decisions of the district courts.
  • The Court of Cassation is competent to hear cases seeking to reverse or set aside decisions of the Court of Appeal and judgments rendered in last resort by the district courts. An appeal to the Court of Cassation does not constitute a third level of appeal. The Court of Cassation does not retry the case, but merely examines the proper application of the law by courts and tribunals to ensure the consistent interpretation of the law throughout the country.
• The Luxembourg Tax Authorities (ACD).

At an international level, the ACD is bound by different mechanisms for the exchange of tax information, including:

• the exchange of information on request under the double tax treaties to which Luxembourg is a party;
• the automatic exchange of information implemented by EU directives for certain types of income (eg, salary, pension, directors’ fees, real estate, life insurance);
• the automatic exchange of information implemented by EU directives for advance tax agreements issued by the ACD;
• the automatic exchange of information implemented by EU directives for certain types of transactions and arrangements (DAC 6);
• the automatic exchange of information under bilateral agreements (ie, the US Foreign Account Tax Compliance Act); and
• the automatic exchange of information implemented by multilateral agreements (ie, the Common Reporting Standard).

At a domestic level, the ACD and the Luxembourg value added tax authorities cooperate with each other. The ACD also exchanges information with the Luxembourg Social Security Organisation.

Traditionally, a significant proportion of the practice of the Luxembourg Tax Authorities (ACD) was established based on tax clearances submitted by taxpayers in the form of requests for an advance tax agreement (ATA). This practice was based on the law which is still in force.

However, there has been a significant drop in both the number of ATA requests and the number of approvals granted by the ACD.

Therefore, the ACD currently refers to the law stricto sensu. This approach has increased the number of tax audits, reassessments and disputes.

The starting point is usually a review of a taxpayer’s tax return.

Other red flags for the ACD include:

• failure to comply with a request for additional information from the tax authorities; or
• the provision of further information which is considered insufficient or incomplete.

In practice, the ACD has discretionary power to decide whether to initiate a tax audit/investigation.

Tax investigation cannot, in principle, relate to tax years that have already been covered by the statute of limitations.

In Luxembourg, as a main rule, the limitation period is generally five years. An exception applies to cases of non-declaration or additional tax due to incomplete or inaccurate declaration, with or without fraudulent intent: the limitation period for these is 10 years.

Tax investigations usually begin with the issue of a request for information by the ACD.

Tax controls and investigations are thus primarily conducted off-site, although they may also be conducted in-situs. The ACD will proceed with the analysis and verification of documents and information received from the taxpayer. There follows a period of exchange of letters between the ACD and the taxpayer on the issues raised by the ACD. These exchanges are governed by the adversarial rule set out in the General Tax Law. There may also be meetings between the ACD and the taxpayer, which can be assisted by its advisers.

An audit report will then be issued by the ACD in which it mentions the points that have been investigated and its findings thereon. The audit report is transmitted to the concerned tax office, which will proceed with a tax reassessment accordingly.

There is no typical timeframe for a tax investigation. This will depend on:

• the volume of documents to be investigated; and
• the specific situation of the taxpayer.

Under Luxembourg law, the ACD has wide powers – especially since the legal provisions governing tax investigations are old and imprecise. De facto, the ACD has discretionary powers.

Third parties: Any person other than taxpayer – with the exception of persons designated as close relatives – must also provide the ACD with information on facts that are important:

• for the purposes of a tax inspection; or
• in the context of a tax investigation procedure to determine the amount of tax due.

Information must be provided truthfully and in good faith. Anyone who is unable to provide information from memory must consult the accounting documents and books at his or her disposal and, if necessary, extract notes therefrom. Information must be provided in the form and content specified by the ACD in accordance with the laws and implementing provisions.

In principle, attorney-client privilege may be invoked by qualified lawyers (who are duly registered with the Luxembourg Bar), except when they are involved in tax advisory activities.

Attorney-client privilege may still be binding on the ACD where:

• lawyers are engaged in pre-litigation or litigation activities; or
• a lawyer’s responses to questions about his or her client could expose the client to the risk of criminal prosecution.

Based on the domestic regulations still in force, banks may still oppose the lifting of banking secrecy to the ACD to avoid having to disclose information requested.

In certain cases, a person who is questioned may refuse to answer questions which, if answered, would expose him or her, or his or her relatives, to criminal prosecution.

In general, the burden of proof in order to reduce a tax charge rests with the taxpayer, so it is in the taxpayer’s interests to communicate all information justifying such a reduction to the ACD.

De facto, a taxpayer that is subject to a tax investigation cannot refuse to disclose.

With regard to attorney-client privilege and banks’ professional secrecy, please see question 2.6.

When preparing a tax return, the taxpayer must provide all necessary information to the best of its knowledge. The form and content of declarations must comply with the requirements of the ACD.

When filling in tax forms, the taxpayer must answer all questions. Questions and answers must be formulated in such a way as to enable the ACD to verify the accuracy of the taxable basis.

Tax returns must be accompanied by the documents required under the applicable laws and regulations.

Upon request, taxpayers may also be required to confirm that they have provided information in good faith. Any intentionally incomplete or inaccurate declaration, or any failure to declare, is punishable by an administrative fine.

On request, taxpayers must prove the accuracy of their tax returns. Where a tax return gives rise to suspicion, the taxpayer must:

• expand on it;
• clarify the facts; and
• where possible, prove its assertions.

Upon request, the taxpayer must produce business records, books and documents, as well as any documents important for tax assessment purposes, so that they can be consulted and verified accordingly.

The same obligations apply to transactions between associated companies with regard to transfer pricing matters.

During a tax investigation, the taxpayer cannot object to or challenge the ongoing proceedings.

Once an audit report has been completed and issued by the ACD, a reassessment will be conducted by the relevant tax office. At that stage, the taxpayer can appeal the tax reassessment.

The ACD may enforce the orders that it issues within the limits of its legal powers by means of fines, which are directly payable by the taxpayer.

Individual penalty payments may not exceed €25,000.

The costs of third-party enforcement and direct constraint may be recovered in advance, in an amount to be provisionally estimated.

Direct coercion may be used only if:

• the order cannot be executed in any other way; or
• there is imminent danger.

Before ordering a coercive measure, the obliged party must be invited to perform the required act through:

• the threat of a coercive measure; and
• the establishment of a reasonable timeframe for performance.

The summons and threat must be made in writing, unless the situation is extremely urgent.

In addition, the ACD may unilaterally impose an ex officio assessment on an estimated, lump-sum tax basis, that most likely will be unfavourable to the taxpayer.

The ACD may file for bankruptcy against a taxpayer that cannot pay the tax amount due.

As the ACD has discretionary powers, it is free to decide whether it has received sufficient information to stop a tax investigation.

However, it is currently not possible for taxpayers to enter into transactions with the ACD in order to reach a settlement.

The ACD will first issue a warning to the taxpayer to pay the tax amount due.

If the taxpayer does not respond, the ACD can initiate the following forced collection measures:

• direct constraint;
• a summons to pay; and
• a summons on a third-party holder.

In addition, the ACD has the right to:

• impose a mortgage on the taxpayer’s house; and
• seize the taxpayer’s wages.

Incomplete or inaccurate declarations are punishable by a fine of between 5% and 25% of the taxes evaded. The law specifies that intent on the part of the taxpayer is required.

Simple tax fraud is punishable by a fine of between 10% and 50% of the taxes evaded. The undue advantage may relate to either the amount of tax evaded or undue refunds. The penalty imposed under Section 396(1) of the General Tax Law requires that the following be established:

• An unjustified tax advantage has been granted; or
• A tax liability has been set which is lower than the amount that should have been withheld had the actual situation been established.

In case of unintentional tax evasion, the administrative fine:

• must not exceed 25% of the amount of tax evaded or the refund unduly obtained; and
• must be at least 5% of the tax evaded or the refund unduly obtained.

Late interest is calculated as follows:

• For personal income tax and corporate income tax, the monthly rate amounts to 0.6% of the claimed amount;
• For net worth tax, the monthly rate amounts to 1% of the claimed amount; and
• For municipal business tax, the monthly rate amounts to 1% of the claimed amount.

During a tax audit, the taxpayer benefits from certain protections based on general principles of law:

• The ACD must use the most appropriate means to achieve the desired goal (principle of adequacy);
• These measures must be the least invasive to the taxpayer’s privacy (principle of necessity); and
• The severity of the necessary measures employed must be balanced against their effect on the public interest (balancing principle).

Yes.

The following are punishable as aggravated tax fraud:

• The tax evaded is more than 25% of the annual tax actually due and at least €10,000;
• The undue reimbursement is more than 25% of the annual reimbursement actually due and at least €10,000; or
• The amount of annual tax evaded or the annual refund to be made exceeds €200,000.

The penalties for aggravated tax fraud include:

• imprisonment for between one month and three years; and
• a fine of between €25,000 and an amount representing six times the amount of tax evaded or the refund unduly obtained.

If the fraud involves a significant amount – either in absolute terms or in relation to the annual tax due or the annual refund due – and has been committed through the systematic use of fraudulent manoeuvres designed to conceal relevant facts from the authorities or to persuade them of inaccurate facts, this will constitute the crime of ‘tax swindling’ and will be punishable by:

• imprisonment for between one month and five years; and
• a fine of between €25,000 and 10 times the amount of tax evaded or the refund unduly obtained.

No.

Currently, there is no voluntary disclosure or amnesty law applicable in Luxembourg.

Taxpayers that wish to proceed with the regularisation of their tax situation must contact the Luxembourg Tax Authorities on a case-by-case basis and submit their pending tax returns. Depending on the case, penalties may be imposed.

See question 1.3.

N/A.

Administrative Tribunal: The recourse for reformation (for a definition, see question 9.1) must be filed with the Administrative Tribunal within three months of receipt of the Luxembourg Tax Authorities’ (ACD) decision rejecting the claim against the concerned tax assessment.

If the ACD does not reply to the claim against the tax assessment, the recourse for reformation must be filed with the Administrative Tribunal within six months of filing of the claim.

Upper Administrative Court: An appeal must be lodged with the Upper Administrative Court within 40 days of notification of the Administrative Tribunal’s judgment/decision.

Administrative Tribunal: The original and four certified true copies of the recourse for reformation must be filed with the Administrative Tribunal before the three-month deadline (see question 5.1) expires.

Four sets of supporting documents relating to the recourse for reformation must also be filed with the Administrative Tribunal at the same time as the recourse for reformation.

Upper Administrative Court: The original and four certified true copies of the recourse for reformation must be filed with the Administrative Tribunal before the 40-day deadline (see question 5.1) expires.

Four sets of supporting documents relating to the recourse for reformation must also be filed with the Administrative Tribunal at the same time as the recourse for reformation.

Judicial Tribunal: In case of opposition to forced collection measures, service of summons by a bailiff is required.

There is no new legal demand, but new means/proofs are allowed.

No.

Yes – as a main rule, the filing of an appeal does not suspend payment of the tax amount claimed by the ACD.

By derogation from the main rule, a request for a stay of execution may be filed with:

• the head of the ACD at the claim stage; or
• the president of the Administrative Tribunal at the judicial stage.

No – see question 5.5.

If a tax dispute is decided in favour of the tax authorities, late interest is due if the tax has not been settled.

If a tax dispute is decided in favour of the taxpayer and the tax has already been settled, no interest is due by the state.

The main rule is the duty to cooperate with the Luxembourg Tax Authorities.

Exceptions do exist for banks and qualified lawyers who are duly registered with the Luxembourg Bar.

See question 2.6.

See question 2.6 regarding banks.

See question 2.6 regarding attorney-client privilege.

Proof can be provided by any means except by oath.

Expert reports and studies are acceptable.

The following rules govern the burden of proof:

• As a main rule, the burden of proving the facts triggering tax liability rests with the Luxembourg Tax Authorities (ACD); while the burden of proving the facts releasing the taxpayer from tax liability or reducing the tax charge rests with the taxpayer.
• In case of hidden dividend distribution, according to case law, the burden of proof rests primarily with the ACD. The ACD must conduct an impartial and objective examination of the taxpayer’s tax returns and identify any elements which appear doubtful and which could indicate the existence of hidden dividend distributions. If the ACD can point to a set of circumstances that makes such a distribution likely and that have not been clarified or documented by the taxpayer, it can question the economic reality of the transaction and assume an undue reduction in the company’s profits, without having to justify it exactly.

In this case, the burden of proof is reversed, with the taxpayer having to prove that:

See question 7.2.

In Luxembourg, tax hearings are, as a main rule, public.

Decisions of the Administrative Tribunal and the Administrative Court are published on an anonymous basis.

• A claim against a tax assessment is submitted to the head of the Luxembourg Tax Authorities (ACD).
• The ACD may reply stating that:
• • it has accepted the taxpayer’s request; or
  • it has denied the taxpayer’s request with a refusal decision – in which case a recourse for reformation (see question 9.1 for a definition) may be filed with the Administrative Tribunal within three months of the date of the refusal decision.
• Alternatively, the ACD may not reply – in which case a recourse for reformation may be filed with the Administrative Tribunal within six months of the date of submission of the claim.
• The Administrative Tribunal may either reverse or uphold the ACD’s decision.
• In either case, an appeal may be lodged with the Administrative Court within 40 days of notification of the Administrative Tribunal’s decision.

The filing of a claim or a recourse for reformation does not suspend the duty to pay the contested tax amount. A request for a stay of execution may be submitted to the head of the ACD, the Administrative Tribunal or the Administrative Court.

Before the Administrative Tribunal:

• A recourse for reformation is filed;
• The ACD must respond within three months;
• The taxpayer must reply to the ACD’s response within one mont
• ; and
• The ACD must respond further within one month.

No.

Yes – in case of a recourse for reformation, which is the main recourse for tax matters, the courts have full powers to review both facts and legal questions.

Administrative phase: The administrative phase involves the following:

• a claim – that is, is a complaint against a tax assessment – which is submitted to the head of the ACD. The penalty for failure to lodge a claim with the head of the ACD is the inadmissibility of a direct appeal to the Administrative Tribunal;
• a request for a stay of execution, if needed;
• formal hierarchical recourse to the head of the ACD against discretionary decisions (eg, decisions not involving tax assessments); and
• an ex gratia remission, which may be filed if the levying of a tax whose legality is not contested would entail hardship incompatible with equity, either:
• • objectively according to the matter; or
  • subjectively in relation to the individual taxpayer.

Judicial phase: The judicial phase involves a recourse for reformation – that is, an appeal on the merits through which the taxpayer can challenge decisions of the head of the ACD. This recourse is specially provided for under certain laws with regard to individual decisions in which the judge, in addition to the review effected within the framework of the appeal for annulment, also reviews the appropriateness of the decision and can substitute his or her own assessment for that of the ACD.

If the Administrative Tribunal considers the appeal to be well founded, it will itself issue a new decision, replacing that of the ACD.

Recourse for annulment: A recourse for annulment before the Administrative Tribunal is a legal appeal through which the taxpayer can challenge decisions of the head of the ACD.

If the Administrative Tribunal considers the appeal to be well founded, it will cancel the contested decision and remand the case to the head of the ACD.

A recourse for annulment is generally available in administrative matters if the law does not provide for a specific recourse.

In tax matters, however, the recourse for reformation is expressly provided for by law.

With regard to the exchange of tax information, a recourse for annulment is available against an injunction issued to the holders of the information requested.

Yes, decisions of the Administrative Tribunal can be appealed on both factual and legal grounds:

• An appeal must be lodged with the Administrative Court within 40 days of notification of the Administrative Tribunal’s decision.
• The ACD must respond within one month;
• The taxpayer must reply to the ACD’s response within one month; and
• The ACD must respond further within one month.

Representation by a qualified lawyer who is duly registered with the Luxembourg Bar is mandatory.

The ruling of the Administrative Court is final and thus cannot be appealed.

Costs and expenses must be borne by the losing party.

The winning party may partially recover its costs by requesting the court to order the losing party to pay procedural allowances.

Yes, contingency fees or success fees are permitted in Luxembourg, as long as the ethics provisions issued by the Luxembourg Bar are complied with.

In Luxembourg, there are no specific tax provisions governing the reimbursement of legal costs, either by insurance companies or by third parties.

If a taxpayer’s income is low, and subject to certain conditions being met, they may be eligible for full or partial legal aid.

Advance pricing agreement (APA) and advance tax agreement (ATA) procedures do exist, but requests for APAs and ATAs have become increasingly infrequent.

A mutual agreement procedure does exist and is commonly used by taxpayers in Luxembourg.

The Law of 20 December 2019 establishing a mechanism for settling tax disputes transposed EU Directive 2017/1852 into domestic law. This directive is based on Action 14 of the OECD Action Plan on Tax Base Erosion and Profit Shifting.

The purpose of the law is to:

• establish rules relating to a mechanism for the resolution of disputes between Luxembourg and one or more EU member states which arise from the interpretation and application of agreements and conventions concluded by Luxembourg with one or more EU member states; and
• provide for the elimination of double taxation of income and, where applicable, capital; and
• establish the rights and obligations of those concerned when such disputes arise.

Luxembourg’s position is compliant with Article 25 of the OECD Model Tax Convention (including commentary).

The Law of 24 September 2014 dealing with information exchange in tax matters has been significantly overhauled in response to Court of Justice of the European Union case law, and particularly its decision in Berlioz.

The Luxembourg administrative courts have also helped to shape the regime on the exchange of information in tax matters based on the European Convention of Human Rights and the European Charter of Fundamental Rights.

A MAP does exist and is used by taxpayers in Luxembourg. However, the MAP has no interaction with, and therefore no impact on, domestic proceedings.

The Luxembourg tax dispute landscape has changed dramatically over the last 10 years, with a continual increase in tax audits, reassessments and tax disputes.

Criminal tax law will become an important component of tax litigation cases. This will inevitably raise questions about taxpayers’ rights of defence.

With regard to tax management for in-house tax counsel and investors, tax litigation and dispute prevention have become key concerns.

Taxpayers that find themselves embroiled in a tax dispute should stand up for their rights by availing of all legal remedies that are provided for by law.

Likewise, taxpayers should answer all information requests from the Luxembourg Tax Authorities, in order to comply with both the adversarial rule and their duty to cooperate.

At every stage of the procedure, taxpayers have rights as well as duties. The rights of defence – an integral aspect of human rights – must be fully respected and enjoyed by all citizens, including taxpayers, in a state governed by the rule of law.

The main pitfall is thinking that it is useless to defend oneself, losing patience and giving up.

Tax controversies are now a key part of companies’ tax risk management. Anticipating tax audits and collecting proof and supporting documents for each transaction are top priorities for in-house tax directors, chief finance officers and chief legal officers.

If necessary, advice should be sought from tax lawyers that specialise in tax dispute resolution.