In its judgment of 17 September 2025, the Lower Administrative Court (Tribunal administratif) delivered a significant decision (n°47603) on permanent establishment determination and commercial profit characterisation for non-resident professional service providers. The Court ruled that the Luxembourg Tax Authorities (Administration des contributions directes) ("LTA") wrongly concluded there was a Luxembourg permanent establishment for an English law firm, despite the firm's participation as general partner in a Luxembourg simple limited partnership (société en commandite simple).
The LTA requalified "the activity exercised in Luxembourg" as being a permanent establishment of the English firm and considered that it realised commercial profit through the Luxembourg permanent establishment. This characterisation had significant tax implications, subjecting the firm to both corporate income tax under Article 14 LIR and municipal business tax (impôt commercial communal).
This requalification was significant because the English firm argued it exercised exclusively civil professional activities as a law firm. The LTA contended that once a permanent establishment exists in Luxembourg, the income generated through that establishment must be characterised as commercial profit, irrespective of the underlying nature of the activities.
The Court emphasised that the burden of proving the existence of a permanent establishment with resulting tax consequences rests with the State and this allocation proved decisive. The State party had failed to establish that the English firm exercised an activity in Luxembourg which could be connected to a presence in Luxembourg meeting permanent establishment criteria.
The Court found that mere assertions by the State party were insufficient to establish that the English firm exercised activities in Luxembourg that would satisfy permanent establishment conditions. The DTA had argued that the Luxembourg partnership operated from Luxembourg with an official and effective Luxembourg address, and that the English firm had no separate website or professional premises. However, this evidence proved insufficient.
Central to the Court's reasoning was distinguishing between the activities of the Luxembourg partnership and those attributable to the English firm itself. The Court concluded that it does not emerge from elements submitted that the English firm has a Luxembourg permanent establishment, nor a permanent representative.
While partnerships are generally fiscally transparent for Luxembourg tax purposes, this transparency does not automatically attribute the partnership's physical presence to its partners for permanent establishment purposes. The Court required concrete evidence that the English firm itself exercised activities in Luxembourg through a fixed place of business at its disposal.
Having concluded that no permanent establishment existed, the Court held that the English firm cannot be considered as realising commercial profit in Luxembourg susceptible to being qualified as taxable domestic income. This conclusion eliminated both the corporate income tax liability and the municipal business tax liability that had been assessed.
The commercial profit characterisation was thus entirely dependent on the prior finding of a permanent establishment. Without that threshold being met, the question of whether the income should be characterised as commercial or liberal professional income became moot.
Conclusion
By reformation of the director's decision, the Court ruled that the DTA wrongly concluded there was a Luxembourg permanent establishment and referred the file for further proceedings. The decision reinforces that permanent establishment determinations require rigorous factual analysis rather than presumptions based on partnership structures alone, and that commercial profit characterisation depends on meeting this threshold requirement.
Share on
