In a judgment dated 17 March 2022, the Luxembourg Higher Administrative Court (Cour administrative) ruled that tax assessments issued by the Luxembourg Tax Administration (“LTA”) must adequately explain the reasons justifying the position taken therein in order to enable the taxpayer to understand the substance and scope of the tax imposed.
Facts of the case
In the case at hand, the company (the “Company”) failed to submit a tax declaration for the year 2015. The LTA therefore issued an ex officio tax assessment pursuant to § 217 of the General Tax Law. The ex officio assessment was based on the Company’s published financial accounts but did not recognise an impairment booked by the Company on the value of certain securities. As a result, the taxpayer’s taxable result was increased by approx. 11 million euros.
The Company challenged the ex officio assessment but the Director of the LTA rejected this administrative appeal on the grounds that the claim was time-bared since it had been filed after the three month deadline.
The Company brought the matter to the Lower Administrative Court, which rejected the taxpayer’s claims. In an appeal to the Higher Administrative Court, the Company argued that the ex officio assessment did not meet the formal requirements of § 211 sub-paragraph (2) of the General Tax Law since it failed to adequately explain the tax basis computation and the rationale of the denial of the impairment. Failure to meet this requirement should result, according to the case law, in the three months period of limitation not being applicable.
Finding of the Court
The Higher Administrative Court first confirmed that the requirements set out by § 211 sub-paragraph (2) of the General Tax Law apply to ex officio assessments.
Secondly, the Higher Administrative Court found that §211 sub-paragraph 2 requires that the tax office motivates its decision regarding the tax imposed by indicating in the tax assessment the tax base(s) applied. The Higher Administration Court added that § 211 sub-paragraph 2 did not require that the LTA provide an exhaustive explanation of the tax bases but must at a minimum make explicit the underlying reasons for the taxation imposed in a manner which allows the taxpayer to understand their scope and substance. According to the Higher Administrative Court, the LTA may not simply limit itself to general and abstract comments without specifying the reasons and justifications of the decision. Such comments may, as in the present case, amount to a lack of motivation of the LTA’s decision, which prevents the taxpayer from formulating a successive appeal and inhibits judicial review of the tax imposed.
In the case at hand, the LTA should have briefly explained why it rejected the value impairment booked in the Company’s accounts when it relied on those same accounts to determine the remainder of the Company’s tax liability. The LTA should have substantially justified its decision to reject the value impairment. Thus, the tax assessment did not meet the requirement of § 211 sub-paragraph (2) of the General Tax Law.
As a result, the Higher Administrative Court held that the Company’s administrative claim was admissible since failure to meet the formal requirements of § 211 sub-paragraph (2) implies that the three month deadline to appeal the tax assessment had not started to run.
The case presents a welcome clarification in favour of the taxpayer of the obligation on the LTA to justify its position in tax assessments. In particular, the judgement makes clear that the LTA cannot limit its justifications to vague and abstract explanations, even in case of ex officio taxation, but must give a specific and concrete explanation of its position in a manner which enables the taxpayer to understand the position taken.