Agefi Luxembourg - novembre 2024

AGEFI Luxembourg 42 Novembre 2024 Droit / Emploi By Emilien LEBAS, Partner, Head of International Tax and Tax controversy & dispute resolution leader & Valentine PLATEAU, Manager, International Tax, KPMG Luxembourg F or about 15 years, tax has been a fast-paced area, and the tax envi- ronment inLuxembourg has the- refore significantly evolved, especially recently. Ontheonehand,thisevolutionis partlytheresultofinitiativestaken by the European Union and the Organisation for Economic Co- operation and Development (OECD). The brand-new Pillar II law (1) , which taxpayers and practi- tioners are currently trying to grasp, is arecentprimeexample oftheincreasing complexityoftoday’stax-relatedproblem- atics.Beyondsimplyunderstandingthelegal texts, it is also often challenging for taxpayers to nav- igate rules that are still being drafted and clarified by theOECD itself via a series of open-ended guidance, andbeawareofallthesubsequenttaxobligationsthey are required to complywith. On the other hand, the changing landscapemay also be observed in a purely domestic environment, both at the level of the Luxembourg direct tax authorities (LDTAorACD for Administration des contributions di- rectes ) in their interactions with taxpayers, and at the leveloftheadministrativejurisdictionsasthepositions they take in the tax area sometimes give the impres- sionof fluctuating. Inthisarticle,wewillhighlighthowtheseinteractions between tax offices and taxpayers have evolved and attempt to identify emerging trends taxpayers and practitioners need to bewary of. Post tax ruling era Continuingatrendthatbeganabout10yearsagoand encouraged by high-profile decisions (2) from Euro- peanUnioninstitutions,thegrantingoftaxrulingshas become rare inLuxembourg. Incomparison,theLuxembourgdirecttaxauthorities grantedcloseto600taxrulingsin2013,andmorethan 700 in 2014 (3) . Overall, the number of tax rulings granted annually has decreased nearly 95%over the last ten years. The tax ruling practice, which used to berelativelycommon,hasnowbecometheexception, resulting in a noticeable increase in taxdisputes. Thetaxrulingprocedure (4) ,initiatedbyarequestsub- mittedbythetaxpayer,enablesthetaxofficetotakea position regarding the tax treatment of a transaction (or series of transactions). Such a position would be binding on the tax office. However, these rulings are not easilyobtainable as they remain contingent upon the taxpayer’s commitment to execute the said trans- actions exactly as described. Consequently, any dis- crepancy observed between i) the facts and circumstances, and transactions, as presented to the competenttaxofficeandonthebasisofwhichthelat- terhasissueditsdecision,andii)theactualimplemen- tationcoulddeprive theadvance rulingof itsbinding effect on the tax office (5) . In practice, advance tax agreements or tax rulings had the immense merit of clearly establishing the Luxembourg taxauthorities’ stanceoncertain topics and technical questions, promoting legal certainty andallowing taxpayers toorganize their operations with a certain level of comfort, in accordance with these positions. Additionally, these tax agreements typically led to preliminary discussions between the parties, thereby fosteringmutualunderstandingandacertainlevelof cooperation between the tax administration and tax- payers.Thegradualdisappearanceofthispracticehas thus contributed to blurring the tax authorities’ posi- tionsoncertainpointsfromtheperspectiveofthemar- ket and taxpayers in general, which, given the increasing complexity of current tax legislation, has led to a risingnumber of disagreements. Tax audit –An emerging trend? Conversely,taxaudits( contrôleapprofondi ),whosefre- quency had decreased during the pandemic period, havebeenontheriseagainsince2022.Giventhatthey have proven to be an effective weapon based on the tax revenues they generate each year, we can expect theLuxembourgtaxauthoritiestorelyonthemmore in the coming years. The tablebelowprovides anoverviewof thenumber oftaxauditsconcludedinrecentyears.Itisimportant to emphasize that these figures represent only audits that have been finalized; a significant number of tax auditsinitiatedand/orstillongoingduringtheseyears should also be taken into account. The significant variation in tax revenue in 2022 mostly results from revisions relating to transfer pricing following the new legislation adopted, in linewith theOECD’s Base Erosion and Profit Shift- ing (BEPS) action plan. To be fair, when appreciating the volume of addi- tional taxes levied thanks to the increased number of tax audits, one shouldbear inmind that a signifi- cant amount of these audits have ended up in tax controversy cases in front of the administrative ju- risdictions (first instance or appeal). In the Luxem- bourg direct tax procedure, the tax claim filed against a tax office’s decision in front of theDirector of the LDTA has in principle no suspensive effect, with only limited exceptions. The same goes for the appeal against a negative de- cisionfromtheDirectoroftheLDTAonsuchaclaim. In trivial terms, thegeneral principle is therefore that a taxpayer has to pay first and can then try to chal- lenge thedecision theyarenot happywith. Basedon the outcome of the ongoing tax controversy cases andthesignificantamountoftaxescollectedatstake, thefinal picture could theoreticallybequitedifferent from the one given by the above table. In principle, theLDTAenjoycompletediscretion in the taxpayers theychoose toaudit, as theAdministrativeCourt re- cently reaffirmed that they were not required to in- form them regarding the reasons leading to their selection (6) .Hence,wewouldrecommendbeingpre- pared for tax audits which are often complex, lengthy and stressful procedures. Depending on what the auditors are looking for, theymaywell last several months, if not more. A recent study on this topic (7) revealed that taxpayers (and sometimes even professionals) lack a clear un- derstanding of tax audits and how they are con- ducted. One key issue is the general opacity of the procedures, with taxpayers usually unaware of their rights. Thus, in numerous instances, audited taxpay- ers have ended up either disclosing toomuch or not enoughinformation,ornotbeinginformedinatimely mannerofwhattheirnextmoveshouldbe.Giventhe significantimpacttheseproceduresmayhave,itis,in our view, essential for individuals and corporate tax- payers targetedby a tax audit to seek assistance from experiencedprofessionalswhowill bebest equipped toprotect their interests. Tax Litigation – general overview/statistics The litigation activity of the Luxembourg tax author- ities, which had experienced a slight decline in the 2020-2021 period (mostly explained by the general slowdown caused by the COVID-19 pandemic) has started picking up again since 2022, even surpassing pre-pandemiclevels.Overall,theLuxembourgdirect tax authorities reported that the number of appeals submittedtotheirDirectorhassteadilyincreasedover the last decade, with a 57% rise between 2014 and 2023 (8) . Thus, while around 1,200 administrative ap- peals were introduced in 2014, approximately 1,500 werelodgedin2018.Incomparison,theLuxembourg direct tax authorities reported having received around 1,700 and 1,800 claimsrespectivelyin2022and2023. In April 2024, a parliamentary question (9) wasputtotheMinistry of Finance requesting certain de- tailsregardingthesefigures. The latterprovidedsomeinteresting clarifications, helping to better contextualizethenumbersand thus offer a clearer un- derstanding of the evolutionoftax-related litigation(bothadmin- istrative and judicial). Notably, the growing number of disputes is re- flected, among other things, by a moderate but steady increase in the number of claims submitted to the Director of the LDTAinvolvingmultipletaxyears(i.e.,morethanone tax year with respect to the same taxpayer). In other words, disputes increasingly seem not to be due to isolated errors in individual annual tax returns, but ratheraretheresultofdisagreementsbetweentaxpay- ers and tax offices on approaches or positions taken that are likely tobe reiteratedandhave repercussions in subsequent returns. Such an increase has also led to a corresponding rise in the number of cases subsequently brought before theAdministrativeTribunal.While theproportionof claimsreferredtotheAdministrativeTribunalhasnot increased in itself (around15%), theabsolutenumber of appeals has followed the same upward trend. InApril 2022 (11) , in response to a parliamentary ques- tion, it was however revealed by the justice minister, Sam Tanson, that in the vast majority of tax-related cases, the Luxembourg direct tax authorities were provenright byeither theAdministrativeTribunal or theAdministrativeCourt.Amongthe1,181casesthat were referred to either of the administrative jurisdic- tions between June 2018 and April 2022, taxpayers were successful inonly168of them(14.2%). It isdiffi- cult at this point to interpret this situation, given that the increase in tax controversies is a relatively recent phenomenon.Whatisclear,however,isthatallparties concerned,includingbutnotlimitedtotaxpayersand their advisers, have had to learnhowtonavigate cer- tain aspects of the procedures and how best to ap- proach tax disputes in general. Probably even more importantly, theyhavehad to learnhowtoanticipate possiblequestionsandchallengesbytheLDTAontax positionstakeninthetaxreturnsandensureadequate documentationandthepreparationofdefensivefiles. At the end of 2022, around 8,700 claims were still pending at the level of the Director of the LTDA(12). Although we do not have more recent figures, it seems unlikely that the number of claims pending at this level has significantlydecreased since then. Theneedforadaptingtheorganizinganddeveloping taxexpertisealsobecamecleartoadministrativejuris- dictions themselves. Recent changes in the administrative jurisdictions’ organization andprocedure Acknowledging the need for greater tax expertise as tax litigation continues to grow, the Administrative Tribunal established a new chamber in September 2023 specializing in tax litigation. The purpose of this chamberistohavejudgesbetterequippedtoaddress tax problematics effectively, as those cases often in- volve highly complexfinancial structures. Althoughitistooearlytodrawanyconclusionsabout theeffectofsuchareorganization,andwhetheritwill impactcaseprocessingtimesinthelongterm,itclearly demonstrates the judges’ intention toestablisha level playingfieldinhandlingtaxdisputeswhichisinitself verypositive.Asmentionedpreviously,thecomplex- ity of tax rules has dramatically increased in the last 10 to 15 years and this trend has not yet reached its peak.With2024being thefirst year of Pillar 2 lawim- plementation, there is no doubt that complexity and uncertaintyintaxmattersisgoingtoreachanewlevel witha likely rise in futurevolumesof tax controversy anddispute resolution cases. When it comes to procedures, one important recent development concerned the bill of law 8186, initially proposedinMarch2023 (13) bytheformerLuxembourg governmenttomodernizeand(supposedly)simplify certainaspects around taxprocedures. Thebill of law 8186 hadbeenput onhold for a fewmonths after the change of Government, due to opposition from the StateCouncil, aswell as the upcoming elections. Many tax practitioners have expressed their concern regardingthetextinitsinitialversion,whichistheone proposedinMarch2023.Generallyperceivedasone- sided(i.e.,largelyinfavoroftheLDTA)asiteffectively weakenstaxpayers’rights(inparticularintheexercise of their right to appeal) while tightening their obliga- tions, the bill of law8186 has been criticizedbymany professionals, who have argued that it should be re- draftedinamorebalancedway.Althoughoneappre- ciates theneed todefend the integrityof thedomestic taxsystemagainsttaxevasionbutalsoagainstaggres- sivetaxplanning,onemayalsowonderwhethersuch a law, if it were to be adopted, may not have a coun- terproductive effect, by contributing to a continued deterioration in the relationship between the LDTA and taxpayers and, more broadly, in trust in the fair- ness of tax procedures. The newly elected Government has thus decided to split the bill of law8186 into twodistinct bills. Bill of Law8186A includes the less controversial pro- visionsoftheinitialbillandwasapprovedbytheState Council on22October 2024. It is expected tobevoted onbefore year-end. Ontheotherhand,billoflaw8186B,thatcontainsinter aliatheaforementioneddebatedprovisionsregarding taxpayers’rights,hasnotbeenamendedyetandisstill pending at the Chamber of Deputies. The Govern- ment hasmentioned its intention to carry out amore thorough assessment of its provisions. At the time of this article, it is not knownwhich parts of the bill of law8186B are intended to be adopted as is (if any) andwhichparts couldpotentially be aban- donedor partially re-drafted (and, if so, how). Recent signals sent to the market regarding legal certainty have been quite positive, for instance the increasing number of administrative circulars(14) and the de- clared intention topromote dialogue betweenLDTA and taxpayers and, possibly, to revivify the tax ruling practice.Asthesayingis,don’tcrybeforeyouarehurt. Let’s wait and see and not anticipate too much. It is important to emphasize though that these matters need to be resolved, even more so in a country like Luxembourgwhose economy significantly depends on attracting foreign investments. Among other things, investors highly appreciate legal certainty as wellasquick,efficientandpredictableadministrative procedures.Collectively,weshoulddoeverythingwe can to ensure that the systeminLuxembourg contin- ues to offer these qualities. Tax controversy series State of play of the Luxembourg tax environment and direction of travel 1)Lawof22December2023onGlobalMinimumTax, Loidu22 décembre 2023 relative à l’imposition minimale effective en vue de la transpositiondeladirective(UE)2022/2523duConseildu15décembre 2022visantàassurerunniveauminimumd’impositionmondialpour les groupes d’entreprises multinationales et les groupes nationaux de grandeenverguredansl’Union,Mém.A/J.O.G.D.L.n°864/2023du 22décembre2023 . 2)CJEU,8November2022,joinedcasesC-885/19PandC-898/19 P, Fiat; Commission, 31 July 2017, joined cases T-816/17 and T- 318/18,Amazon(overruledbyGCEU,12May2021,C-457/21P). 3)ACD, annual reports for 2013 (p. 15) and 2014 (p. 21), impots- directs.public.lu 4) Article 8 of the law of 19 December 2014 introduced a §29a intotheamendedGeneralTaxLawof22May1931asamended (“ Abgabenordnung ” also referred to as “ AO ”), aimed at formal- izingtheprocedureapplicabletotaxrulingsissuedindirecttax matters( Loidu19décembre2014relativeàlamiseenœuvredupaquet d’avenir–premièrepartie(2015)modifiant(interalia)laloigénéraledes impôts modifiée du 22 mai 1931 (« Abgabenordnung »), Mém. A / J.O.G.D.L.n°257du24décembre2014,p.5475 ). This provision also established a tax ruling committee. Further clarificationwasprovidedbytheGrand-Ducaldecreeof23De- cember 2023. §29aAOdefines a tax ruling as awritten position taken by the tax office officer concerning the interpretation of certain provisions of tax legislation currently in force and their applicationtooneormorespecificandconcreteoperationsthat thetaxpayerplanstocarryout. 5) E. Lebas, La gestion fiscale des entreprises et ses limites, Col- lection l’entreprise et l’impôt sous la direction d’A. STEICHEN, Legitech,21December2021–seechapter2,section2. 6)AdministrativeCourt,14November2023,n°47754. 7) Cahiers de fiscalité luxembourgeoise et européenne, 2023/2, Le contrôle fiscal au Luxembourg : récit d’une pratique méconnue (in- troduction et méthodologie) , 8 December 2023, Fatima Chaouche, p.93-114. 8)ACD,2023annualreport,p.134, impotsdirects.public.lu . 9) Reply to parliamentary question n°559 by Finance Minister, GillesRoth,6May2024, chd.lu 10)Includingbothadministrativeclaimsunder§228AOandfor- malhierarchicalappealunder§237AOand§303AO. 11) Reply to parliamentary question n°5955 by JusticeMinister, SamTanson,15April2022, chd.lu . 12)GenevièveMontaigu,LeQuotidien,5November2023. 13)BillofLawn°8186of17July2024modifyingtheGeneralTax Lawof22May1931asamended 14) For example, Pillar II FAQ published by the tax authorities on 25 March 2024 on minimum effective tax rate, or Circular from the Director of theACD L.I.R. n° 170/1, 170bis/1, I.C.C. n° 44,I.Fort.n°55dated19July2024(Taxtreatmentofasimplified liquidationordissolutionwithoutliquidation) T ax ȱ Y ear ȱ T otal ȱ tax ȱ ruling ȱ granted ȱ by ȱ the ȱ ACD ȱ 2019 ȱ 6 9 ȱ 2020 ȱ 44 ȱ 2021 ȱ 56 ȱ 2022 ȱ 46 ȱ 2023 ȱ 30 ȱ T ax ȱ Y ear ȱ T otal ȱ tax ȱ audits ȱ closed ȱȱ Tax ȱ increase T otal ȱ on Ȭ site ȱ audits ȱ closed ȱ T ax ȱ increase ȱ 2019 ȱ 33 ȱ 4 . 128 . 339,25 14 ȱ 4 . 768 . 186,19 ȱ 2020 ȱ 19 ȱ 4 . 174 . 006,08 20 ȱ 4 . 397 . 458,07 ȱ 2021 ȱ 16 ȱ 5 . 923 . 330,56 40 ȱ 3 . 449 . 271,52 ȱ 2022 ȱ 49 ȱ 99 . 925 . 482,46 16 ȱ 1 . 088 . 292,87 ȱ 2023 ȱ 48 ȱ 1 . 351 . 188,27 2 ȱ 20 . 436,00 ȱ ACD,2019-2023annualreports, impotsdirects.public.lu ACD,2019-2023annualreports T ax ȱ Y ear ȱ T otal ȱ number ȱ of ȱ appeals ȱ before ȱ the ȱ T ax ȱ Director ( 10 ) ȱ Appeals ȱ concerning ȱ more ȱ than ȱ one ȱ tax ȱ year ȱ 201 8 ȱ 1,503 ȱ 275 ȱ 2019 ȱ 1,661 ȱ 287 ȱ 2020 ȱ 1,388 ȱ 231 ȱ 2021 ȱ 1,582 ȱ 384 ȱ 2022 ȱ 1,710 ȱ 363 ȱ 2023 ȱ 1,832 ȱ 388 ȱ 2024 ȱ 592 ȱ 53 * ȱ *Thenumbers for2024areprovisional. Table provided in the context of the Parliamentary Question No. 559 – ChambredesDéputésduGrand-DuchédeLuxembourg (chd.lu)