Key takeaways
On 13 May 2025, the Luxembourg Higher Administrative Court (Cour Administrative) handed down a decision, within the context of an ex officio taxation (i.e. procédure de taxation d’office), on the relevant characteristics that shall be retained for the purposes of the determination of an accommodation’s rental value (i.e., valeur locative).
Facts of the case
From 2011 to 2019, Mr A. rented an entire building from the company AA (hereinafter the ‘Lessor’), comprising 4 dwellings, of which (i) 3 were sublet (hereinafter ‘Dwellings no. 2-4’), and (ii) the last one was kept by Mr A. (hereafter ‘Dwelling no. 1’) for his own private use during the same period. In 2021, the tax office proceeded with an ex officio taxation in accordance with §217 of the Luxembourg general law on taxation (hereafter ‘AO’), for the period in dispute, of the rental income received in respect of Dwellings no. 2-4, resulting in a reduction of the deductible rental expenses considered in connection with the said sub-let properties (hereinafter the ‘Rental Expenses’), resulting in an increase of the net taxable rental income in the hands of Mr. A. (tax charge contested by the latter).
More specifically, Mr. A. contested the allocation of the Rental Expenses retained by the tax office between Dwellings no. 2-4 on the one hand (i.e. charges deductible for tax purposes from the disputed gross rental income), and Dwelling no. 1 on the other hand (i.e. charges treated as non-tax deductible expenses). Based on a valuation report provided at first instance (hereinafter the ‘Valuation Report’), Mr. A. complained that the tax office had overestimated the rental value for Dwelling no. 1, resulting in an underestimated right to deduct the Rental Expenses relating to Dwellings no. 2-4, considered as tax deductible.
Nonetheless, neither the tax office nor the Lower Administrative Court (Tribunal administratif) recognised the overestimation of Dwelling no. 1 argued by the taxpayer.
Outcome of the Higher Administrative Court’s ruling
General principle of ex officio taxation:
The Higher Administrative Court points out that the exact determination of tax bases is a matter of public policy, and that this obliges the tax authorities to endeavour to determine the tax base on the basis of the taxpayer's actual tax situation. However, the ex officio taxation procedure provided for in §217 of the AO allows the tax office to estimate a taxpayer’s tax basis, in the event that expenses that are undeniably real cannot be accurately quantified (i.e., decision of the Higher Admin. Court. dated 25 April 2023, no. 47680C).
Further, the Higher Administrative Court recalls that the tax office and the director involved in the control are required to use the ex officio taxation with discernment in order to determine an estimation of a taxpayer’s taxation as close as possible to the latter’s actual tax bases in accordance with the principles of proportionality and contributory capacity (i.e., decision of the Const. Court, dated 10 November 2023, no. 00185).
Quantum of ex officio taxation in the present case:
In accordance with these principles of proportionality and contributory capacity, the Higher Administrative Court states that the quantum of taxation must be determined on the basis of the market price of Dwelling no. 1 (i.e., the so-called ‘rental value’). More specifically, the Higher Administrative Court ruled that the characteristics relevant to Dwelling No. 1 (i.e., the unhealthy and unsafe aspects of the accommodation and its lack of windows) must necessarily be taken into consideration in accordance with the principle of economic realism and that the judges at first instance were therefore wrong not to have retained such characteristics.
Impact of the Valuation Report on the Higher Administrative Court’s ruling:
In order to determine the rental value of Dwelling No. 1, the Higher Administrative Court mainly relied on the Valuation Report submitted ex-post by Mr. A., which included an exhaustive description of the entire building and Dwelling No. 1 (i.e., a property of 22.7 sqm consisting of a bedroom and a bathroom with no windows and no private access located on the ground floor of the building with the right of access by the Lessor for the purpose of running a restaurant), thus severely impacting the liquidity of Dwelling No. 1 on the market.
The Higher Administrative Court also upheld the conclusion in the Valuation Report by virtue of which Dwelling No. 1 could be solely used as additional premises for a commercial activity. Consequently, the Court rejects the rental value estimates provided by the government representative over the first instance trial, which refer exclusively to practical rents for studio flats used for residential purposes only.
Share on
