Luxembourg’s proposed 2023 tax reforms

Luxembourg’s proposed 2023 tax reforms

On 28 March 2023, the Luxembourg government introduced a bill (Projet de loi 8186) to reform certain aspects of Luxembourg procedural tax law (the Bill). This reform spans several areas and seeks to update Luxembourg tax law which, in some cases, has remained relatively unchanged since the first half of the last century.

Although the underlying intention to modernise Luxembourg tax procedure is certainly welcome, one is left to wonder if the approach chosen by the government is actually the most appropriate. Rather than being an overhaul of the existing rules, the Bill seems to be more of a “patchwork” of amendments trying to bring Luxembourg tax legislation up to speed with recent case law and changes in administrative practice. The Bill eliminates several provisions which have fallen out of use, either because they are not applicable anymore or because they have otherwise become irrelevant. It also seeks to bring in some new changes, such as the possibility to file multilateral advance tax agreements in the context of double tax treaty mutual agreement procedures, but also to introduce additional requirements for tax litigation.

What the reform fails to provide for, however, is a more organic approach to tax procedures, which are not currently streamlined and often depend on the position taken by the individual tax inspectors in charge.

The 10% appeal threshold

The Bill provides for restrictions on the filing of modification requests against tax assessments issued on an ex officio basis: according to the authorities, only a substantial change in the tax position of the taxpayer warrants a change, which could only be appealed by means of a formal administrative appeal.

A 10% threshold is being introduced, which corresponds to the difference between the amount of taxable income or capital that would arise as a result of the appeal and the amount established in the ex officio assessment.

When dealing with multimillion tax bills, setting a fixed percentage as a minimum threshold for access to legal remedies could exclude taxpayers that are adversely affected by ex officio assessments. As a reminder, ex officio tax assessments are not meant to “punish” a taxpayer but to assess the amount of taxes due in the most reasonable manner, i.e. as close as possible to the real amount of taxes due. In practice, this is however not always entirely complied with. Conversely, the 10% threshold still leaves the door open to relatively trivial tax complaints when the differences are really minimal in terms of the quantifiable amounts at stake, such as when differences in the calculation of the minimum net wealth tax are concerned.

Late filings of annual accounts

It is also not clear how this would interact with the new rule according to which the Luxembourg tax authorities would not be officially bound by late filed annual accounts. Although fully understandable from a policy perspective, this change does not seem to take into account certain other impacts: for instance, if an ex officio tax assessment can only be modified by means of administrative appeal, but the only way to request the modification is by referring to the late-filed annual accounts, the whole procedure becomes in essence irrelevant. The tax authorities would simply refuse the request as they would not be bound by the annual accounts.

Areas of tax reform left unaddressed

Additionally, the Bill does not address other important topics, such as the filing of rectified tax returns, which are still governed by administrative practice rather than clear-cut rules: according to current practice, a taxpayer that notices a mistake in its filed tax return may file a rectified tax return out of its own volition; if however a tax assessment was already issued (i.e. a provisional tax assessment) in principle the taxpayer should first appeal against the assessment before filing the rectified tax return accordingly. However, clerical errors in filing tax returns are a common occurrence and taxpayers are left with uncertainties as regards their position.

In conclusion, it remains yet to be seen how the reform will develop and if the legislator will address the tax procedures more holistically. For the time being, we can only wait and see how the draft Bill will evolve.