In a judgment dated 3 March 2026 (No. 53701C), the Higher Administrative Court (Cour administrative, the “Court”) dismissed an appeal brought by the Luxembourg State and confirmed that the Direct Tax Authority (Administration des contributions directes, "DTA") had failed to establish the existence of a Luxembourg permanent establishment in the hands of a UK-incorporated limited liability partnership ("LLP") operating as a law firm. The ruling underscores that assimilation of a foreign entity to a corporation addresses only the characterisation of income, not its territorial nexus.
Background
The LLP held a 99% interest as general partner (associé commandité) in a Luxembourg société en commandite simple ("SCS") that operated a law firm from premises in Luxembourg. The SCS was fiscally transparent under Article 175 of the Luxembourg Income Tax Law of 4 December 1967 ("LITL"), such that a prorata portion of its income was attributed directly to the LLP for tax purposes. The LLP filed corporate income tax (impôt sur le revenu des collectivités) and municipal business tax (impôt commercial communal, “MBT”) returns for the years 2015 to 2019, declaring the income as arising from the exercise of a liberal profession. The tax office, however, issued assessments treating the LLP as maintaining a Luxembourg permanent establishment and characterising its income as commercial profit, thereby subjecting it to MBT. The LLP contested both the existence of a permanent establishment and the commercial characterisation of its income.
Key legal conclusions
Commercial characterisation by legal form does not resolve the permanent establishment question
It was undisputed that the LLP, as a UK entity, was to be assimilated - by application of the comparison of legal forms (Rechtstypenvergleich) method - to a corporation within the meaning of Articles 159 and 160 LITL falling within the scope of § 2(2) No. 2 GewStG. By virtue of that assimilation, all of the LLP's income was deemed to be commercial profit under Article 162(3) LITL, irrespective of the nature of the underlying activity.
The Court recalled, however, that a MBT liability under § 2(1) GewStG is subject to two cumulative conditions: first, the existence of a commercial enterprise (Gewerbebetrieb) within the meaning of Article 14 LITL and, second, the operation of that enterprise through a permanent establishment (Betriebsstätte) on Luxembourg territory. Whilst § 2(2) No. 2 GewStG creates an irrebuttable presumption satisfying the first condition for entities assimilated to corporations - so that the nature of the activity actually carried on is irrelevant - it does not dispense with the second. The permanent establishment requirement accordingly remained a necessary precondition for the LLP's subjection to MBT.
The burden of proof rests with the tax authorities
The Court confirmed that the existence of a permanent establishment - defined by § 16(1) of the Luxembourg tax adaptation law (Steueranpassungsgesetz) as any fixed installation or facility serving the operation of a standing commercial enterprise - is a question of fact, the burden of proof of which rests with the DTA. In the present case, the State had failed, both at first instance and on appeal, to adduce any concrete evidence that the LLP maintained such an establishment on Luxembourg territory. Its argument on appeal amounted to a bare assertion that the LLP's activity "was deemed to be exercised directly" on Luxembourg territory, which the Court declined to accept as sufficient.
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