11 四月 2025 Joakim-Antoine Charvet  -  Danièle Buchler  -  Cyrielle Nis  -  Adrien Piron  -  Delphine Martel  - Pit Glesener Tax

Accounting irregularities preventing the application of a validly obtained tax ruling

Tax rulings have long been and still remain a cornerstone of Luxembourg's tax landscape, playing a pivotal role in offering legal certainty and predictability to taxpayers regarding their tax positions. These agreements between taxpayers and the Luxembourg tax authorities serve to clarify the application of tax laws to specific transactions or arrangements. 

On 22 January 2025, the Administrative Tribunal of Luxembourg (the “Tribunal”) issued a notable decision concerning the subjective elements of legitimate expectations, good faith, and legal certainty in the context of a tax ruling granted to a Luxembourg taxpayer. 

Background of the case:

A fully taxable Luxembourg resident company (the “Taxpayer”) had obtained a tax ruling from the Administration des Contributions Directes (the “ACD”) in May 2011. This ruling addressed the tax treatment of a so-called “total return swap” (the “TRS”) with its Gibraltar-based sole shareholder. The tax ruling stated that, due to the mechanism of the TRS, in cases of positive net results, the profits are paid to the shareholder with a taxable margin of 8% on those profits being retained, while in case of losses, the shareholder compensates the Taxpayer in the amount of the losses, plus a fixed amount that would ultimately be subject to tax (the “Ruling”). 

  • In February 2017, the ACD informed the Taxpayer that the declared loss for 2013 was non-deductible due to the shareholder’s compensation mechanism under the TRS. The ACD requested documents, including the approved financial statements for 2013 and 2014. However, the Taxpayer allegedly could not provide these documents due to legal challenges its shareholder was facing. As a result, tax assessments were issued accordingly. 
  • In August 2018, the ACD informed the Taxpayer that they intended to diverge from the filed tax returns for 2014 by not recognising the deductibility of the declared loss for 2013. As a response thereto, the Taxpayer requested to be taxed applying the Ruling and informed the ACD that several material errors have been identified in the 2013 and 2014 accounts. 
  • In the absence of any response by the Taxpayer, although the ACD requested to be provided with the revised accounts, the ACD finally issued in June 2019 the tax assessments for 2014 not recognising the declared loss for 2013. 

However, The Taxpayer argued that the tax assessments for 2014 did not align with its understanding of the validly obtained Ruling, and therefore challenged these assessments by filing a complaint with the director of the ACD (the “Director”). Attached were new accounts reflecting the TRS mechanism, with rectified tax returns prepared on their basis.

Due to the Director’s silence, the case was brought to the Tribunal where the Taxpayer pleaded the following: 

  • All conditions for the Ruling to be binding are met. Despite the Taxpayer's initial tax returns being based on accounts that didn't incorporate the TRS mechanism, the ACD was still required to apply the Ruling, as reflected in the rectified tax returns submitted with the complaint.
  • Irrespective of the rectified tax returns and accounts, the ACD did allegedly not respect the binding nature of the Ruling, as the Taxpayer should in any case only be taxed on a margin as determined by the Ruling. 
  • By not applying the Ruling for 2014, the ACD violated the principles of legitimate expectation, legal certainty and good faith, given that the Ruling was applied in 2013.

The issue at hand concerned whether the ACD is obliged to apply the validly obtained Ruling, factoring in the rectified tax returns, potentially based on annual accounts deemed irregular.

Findings by the Tribunal:

The Tribunal noted that:

  • §§ 162 to 165 of the Abgabenordnung (the “AO”) require maintaining a regular and complete set of accounts, covering both formal and substantive aspects. The judges found discrepancies in the Taxpayer's accounting, such as inconsistencies between the balance sheet, profit and loss account, and notes. Multiple versions of the annual accounts were recorded without shareholder approval, raising further doubts. The Taxpayer failed to provide documents proving the regularity of the amended accounts (which served as a basis for the rectified tax returns), undermining the presumption of regular accounting in line with §208(1) AO.
  • although a decade ago there were no formal requirements by law, tax rulings relied on the principles of legitimate expectation and legal certainty. Case law had established several conditions for their enforceability against the ACD. According to the Tribunal, although these conditions were met in the case at hand, the Taxpayer must however fulfil its compliance requirements, particularly with regard to maintaining and approving regular accounting records, to benefit from the application of the Ruling in the case at hand. Indeed, the accounting irregularities prevented the ACD from verifying whether the net trading result was positive or negative, which is a fundamental element for the Ruling’s application. 

Consequently, the Tribunal held that the Taxpayer cannot seek to apply the Ruling based solely on legitimate expectation irrespective of the question whether its accounting is regular.

Conclusions:

The decision of the Tribunal serves as a critical reminder for taxpayers: relying on tax rulings or informal assurances by the ACD requires strict compliance with all legal and regulatory requirements to ensure that the validated tax treatment can be applied effectively.