In its judgment of 10 December 2020, the Luxembourg Higher Administrative Court (Cour administrative) had to assess whether revaluation reserves booked in the annual accounts of a Luxembourg resident company should be included in the taxable income.
The case submitted to the Court concerned a company holding a land plot, which aimed to be part of a real estate development project. Due to conflicts between board members and shareholders, the commercial annual accounts had not been filed on time and the tax returns were not sent to the tax authorities within the prescribed deadlines. This led the tax authorities to proceed to an ex officio taxation (taxation by default).
In the ex officio assessment, they included the income deriving from a revaluation reserve booked in draft commercial annual accounts. The taxpayer thereafter challenged the ex officio assessment.
In its judgment, the Court overturned the judgment of the Lower Administrative Court (Tribunal administratif), which previously considered, in line with the position of the tax authorities, that the disclosed latent capital gain should be included in the taxable income as this was mentioned in the commercial annual accounts. In contrast to the Lower Administrative Court, the judgment followed the general principles set forth in the Luxembourg Income Tax Law (hereafter “LITL”), according to which fixed assets should be valued at acquisition costs and only the realized capital gain should be taken into account. Following these general principles laid out in the LITL, the commercial accounts could not be used for the tax assessment and a separate set of diverging accounts for tax purposes should be prepared, with the consequence that the revaluation reserve was disregarded and thus did not lead to the recognition of latent capital gains as they went against the valuation rules laid out in the LITL.
In summary, the Court once again confirmed the relevancy of the valuation principles laid out in the LITL and the outcome when those valuation rules conflict with the ones applied in the commercial accounts. While this case covered the specific situation of an ex officio taxation, taxpayers in general would be well advised to directly submit tax balance sheets together with their tax returns, whenever valuations done in the commercial accounts differ from the valuations required under the LITL.