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April 7, 2023
Luxembourg amends some procedural tax rules
Aiming to simplify and modernize some procedures applicable in tax matters, the Luxembourg Minister of Finance submitted to Parliament a draft law (Draft Law) that would amend the General Tax Law and various other laws.
Among other things, the Draft Law introduces a procedural framework for bilateral or multilateral Advance Pricing Arrangements (APAs) and the obligation for related enterprises to document their transfer pricing policy, in addition to amending some rules with respect to the applicable procedure in tax controversy matters.
This Alert details the most important measures of the Draft Law.
Bilateral or multilateral APAs
The Draft Law introduces a provision dedicated to requests for bilateral or multinational APAs. Currently, bilateral and multilateral APAs are covered by the general procedure for advance tax clearances.
According to the new provision, a written request for a bilateral or multilateral APA based on the provisions of one or more double-taxation treaties must be filed with the Director or his/her delegate. The bilateral or multilateral APA is concluded between the competent authorities of the states concerned based on the mutual agreement procedure as foreseen by the relevant tax treaty(ies). While the details of the procedure are yet to be laid out in an upcoming Grand-Ducal regulation to be issued, the Draft Law provides for the payment of a specific fee amounting to between €10,000 and €20,000, depending on the complexity of the request and the workload associated with it.
Presumption of notification
Under current law, the three-month statutory period for challenging a tax assessment starts on the date that the taxpayer is notified of the assessment, assuming the notification is considered valid. According to case law, a correct notification implies not only that the tax assessment is communicated in one of the forms permitted by law, but also that the Tax Authorities take the necessary administrative steps to ensure that the communication of the tax assessment reaches the addressee directly. It follows that the notification of a decision sent to an erroneous address cannot be considered as correct notification.
For simplification purposes, the Draft Law introduces a presumption that a resident taxpayer is correctly notified of an assessment if it is sent to the address listed on the National Registry of Natural Persons (for individuals) or the address listed on the Trade and Company Register (for companies). For nonresident taxpayers, the notification is presumed to be completed if sent to the latest address declared to the Tax Authorities.
Noncompliance with the mandatory filing of the annual accounts
Companies are required by law to file their annual accounts online with the Trade and Company Register; noncompliance with this obligation is a penal offence.
The Draft Law provides that annual accounts that have not been filed with the Trade and Company Register are not binding on the Tax Authorities. The Draft Law does not specify the tax consequences associated with this new provision, but one may deduce that the Tax Authorities are likely to reject, or at least challenge, a tax return filed on the basis of unfiled annual accounts.
Transfer pricing policy
Under current law, taxpayers must be able to justify the data contained in their tax returns with appropriate information and documentation, which also extends to transfer pricing.
The Draft Law introduces a specific obligation for taxpayers with related enterprises to provide, upon request and presumably within a deadline that may be rather short, specific documentation on their transfer pricing policy. The scope, content and extent of the documentation is intended to correspond to the international standards resulting from the work of the Organisation for Economic Co-operation and Development (OECD) on Action 13 of the Base Erosion and Profit Shifting (BEPS) Action Plan and will be clarified in a Grand-Ducal regulation to be issued.
Claims against a tax assessment
Under current legislation, the formal requirements to claim against a tax assessment are limited to a strict minimum. Inspired by the procedure applicable in front of the administrative courts, the Draft Law introduces new requirements relating to the form and content of such claim.
The claim must be addressed to the Director in a written request to be signed by the taxpayer or its representative. It must contain the name and address of the claimant, the designation of the decision subject to the claim, the subject of the request, a summary statement of the facts and the grounds invoked, the power of attorney of the representative (where applicable) and a list of documents on which the claimant intends to rely. Failure to comply with these requirements will cause the claim to be inadmissible.
The Draft Law also clarifies when a claim can be introduced against a tax assessment that has based the tax payable on an estimate of income or net wealth (i.e., the Taxation Office was not able to determine or calculate the tax base (e.g., where the taxpayer has not filed a tax return or does not provide sufficient explanations with respect to the data declared in the tax return)). In that case, the taxpayer is entitled to challenge the tax assessment only if the difference between the estimated tax base and the actual tax base exceeds 10%.
Payment of the tax
The Draft Law provides that the authority in charge of collecting tax may allow taxpayers with financial difficulties to pay their tax liabilities in installments. A Grand-Ducal regulation to be issued will determine the terms and conditions of the payment by installments.
Procedures before the administrative Tribunal
Procedures for direct tax matters require the taxpayer to first file a claim with the Director contesting a tax assessment or other administrative tax decision. If the Director does not respond within six months to a claim against a tax assessment, the taxpayer can appeal against the tax assessment to the Tribunal. Currently, there is no deadline within which the taxpayer must initiate Tribunal proceedings. Claims contesting administrative decisions, other than a tax assessment (and contrary to the procedure that applies to tax assessments), can only be brought to the Tribunal once the Director has denied a filed claim, meaning that the taxpayer can only file an appeal with the Tribunal against a negative decision of the Director and not against the original administrative decision.
The Draft Law intends to modify these procedures by introducing a 12-month time limit for filing an appeal with the Tribunal. If the Tax Authorities commence an audit, the 12-month period is extended by an additional six months (i.e., providing a total of 18 months). If the Director has not responded to a claim challenging a tax assessment within six months of its filing, the taxpayer may submit his/her claim to the Tribunal during the 12-month (possibly extended to 18-month) period that begins six months after the date of filing of the claim with the Director. The procedures for contesting other administrative decisions would be modified similarly under the Draft Law; i.e., if the Director has not issued a decision within six months following the claim, an appeal may be filed with the administrative Tribunal within a 12-month period, which could be extended by an additional six months if the taxpayer is under audit.
The Draft Law specifies that these provisions will apply to claims filed with the Director as of the date the final law is published in the Official Gazette. Claims that are pending with the Director when the final law is published may be appealed to the Tribunal without a time limit.
Exchange of information
The Draft Law further extends the cooperation between administrations by introducing the possibility to exchange relevant information and documents between (1) the Direct Tax Authorities and (2) the Commission de Surveillance du Secteur Financier (public institution supervising the professionals and products of the Luxembourg financial sector) and the Commissariat aux Assurances (public institution supervising the insurance sector).
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Advisory Services Sàrl, Luxembourg City
Ernst & Young LLP (United States), Luxembourg Tax Desk, New York
Ernst & Young LLP (United States), Luxembourg Tax Desk, Chicago
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor