In a judgment dated 30 November 2021, the Luxembourg Lower Administrative Court (Tribunal administratif) ruled that a taxpayer may not successfully modify a material error in his financial accounts in a way that has the effect of amending financial accounts of a previous year for which a tax assessment has become definitive (coulé en force de chose décidée).
Facts of the case
In the case at hand, a subsidiary received a dividend from a sub-subsidiary located in the United Kingdom. The subsidiary passed-on this dividend to its parent company located in Luxembourg (the “Company”) as a reimbursement of share premium account. Due to a material error, these two transactions were not registered in the Company’s 2014 accounts and incorrectly reported in the 2015 accounts. The Luxembourg Tax Administration (“LTA”) issued tax assessments for the year 2014 and 2015. Following receipt of its 2015 tax assessment, the Company filed a modified tax return as well as an administrative appeal against the 2015 tax assessment. In addition, the Company filed corrected financial accounts for the year 2014 and 2015 which were communicated to the LTA.
The LTA rejected the Company’s administrative appeal on the basis that article 41(3) of the Luxembourg income tax law provides that a taxpayer may not rectify or modify a balance sheet that has served as a basis for taxation, except in the event that the taxation in question is still subject to modification or the modification will not result in a change in taxation.
Finding of the Court
Regarding the year 2015, the Lower Administrative Court held that the taxation was still subject to modification as a result of the Company’s timely appeal against the 2015 tax assessment. However, the Lower Administrative Court found that the accounting principle of continuity of balance sheets prohibits a company’s opening balance sheet for a given year from diverging from the previous year’s closing balance sheet. The Lower Administrative Court ruled that this principle was also applicable in tax matters. As a result, an ex-post accounting correction in a year that has been definitively taxed which impacts a subsequent year cannot be made through a simple adjustment to the opening balance sheet of a year for which taxation has yet to be determined.
Since, in the case at hand, the ex-post accounting correction was first registered for the 2014 financial year and the 2014 taxation had become definitive, the Company was prevented from modifying its 2015 financial accounts (by an amendment of the opening balance sheet) although the 2015 taxation still remained subject to modification. The Lower Administrative Court thereby confirmed the LTA’s decision to reject the Company’s appeal.
Taxpayers and their advisors should keep this judgment in mind when considering the timing of ex-post amendments to financial accounts which may impact the taxpayer’s tax position in the relevant years; close attention should be paid to the deadlines for challenging tax assessments issued for those relevant years.