Are Luxembourg tax rulings binding upon the Luxembourg tax authorities? Recent developments

13/01/2016 | Tax | Denis-Emmanuel Philippe
In the following newsflash, we will comment a new interesting judgment of a Luxembourg court (Tribunal administratif) dated 16 December 2015 relating to the binding force of Luxembourg tax rulings.

I.    Luxleaks – rulings on hidden capital contributions

In the case at hand, the Luxembourg tax authorities granted a tax ruling in January 2013 to a Belgian resident contemplating the formation of a new Luxembourg company (“LuxCo”). The Luxembourg tax authorities confirmed the existence of a so-called “hidden capital contribution” (“apport caché” or “verdeckte Einlage”) made by the Belgian resident to LuxCo, which led to the exemption of a percentage (80%) of the profits of the Luxembourg company.

The structure can be illustrated by the following chart:

A “hidden capital contribution” may be briefly defined as an advantage granted to a Luxembourg company by its shareholder. In the case at hand, the hidden capital contribution took the form of a transfer of intangible assets (without consideration), i.e. goodwill, know-how, experience, clients’portfolio, business relationships, expertise, etc. The tax authorities accepted that these intangible assets corresponded to 80% of the commercial profits. The recognition of such hidden contribution led to an exemption of 80% of the profits of LuxCo.
The concept of hidden contribution (and the exemption of the profits derived from the hidden contribution) is supported by the Luxembourg income tax law[1] and recent Luxembourg case-law[2]
It is worth noting that, in the frawework of LuxLeaks, tax rulings recognizing the existence of “hidden capital contributions” were revealed. For instance, Luxembourg banks held by Belgian financial institutions benefited from these rulings. In these rulings, the hidden contribution consisted of expertise/know how allocated by the Belgian Bank to its Luxembourg subsidiary (eg, expertise of an expert which was put at the disposal of the Luxembourg subsidiary, without consideration).

II.     Denial by the tax authorities of the binding effect of the tax ruling – reaction of luxembourg court

Several months later, the Luxembourg tax office changed its mind and denied the binding effect of the tax ruling : it refused to recognize a hidden contribution in the absence of a valuation report established by an independent firm.
LuxCo brought the case before the Luxembourg court (Tribunal administratif). The judge held that the tax authorities were bound by the tax ruling granted in January 2013. The reasoning of the tribunal can be summarized as follows: given that the tax office did not make any reservations with respect to the fixed valuation of the hidden contribution (transfer of know how corresponding to 80% of the commercial profits), it was not entitled to challenge the binding force and the validity of its own decision.
In order to support its position, the Luxembourg court stated that the behavior of the tax authorities breached the principles of the protection of legitimate expectations and of legal certainty.

III.    Conclusion

This judgement shows that the Luxembourg tax authorities have no problem in challenging their own decisions. A recent article published in a Belgian newspaper, revealing a large investigation by the Belgian tax authorities with respect to Luxembourg tax rulings granted to Belgian residents, seems to support this statement[3]. In our opinion, one should however refrain from drawing too far-reaching conclusions from this exceptional attitude: the Luxembourg tax authorities would clearly not have challenged the validity of the ruling, if the hidden capital contribution had been properly supported by a transfer pricing report.
The judgement also seems to indicate that the Luxembourg tax authorities are not entitled to disregard their own decisions, based on the principles of legitimate expectations and legal certainty. In our view, it can however not be excluded that the Cour administrative (Court of appeal) will seek to overturn this judgment and argue that the principle of legality should prevail over the principles of legitimate expectations.

[1] Art. 18 of the Luxembourg income tax law (Loi concernant l’impôt sur les revenus, LIR).
[2] Cour administrative, 7 February 2013, 31339C.
[3] D. SOENENS, « Ook kapper en bakker ontwijken belastingen via Luxemburg », De Morgen, 14 décembre 2015. See also in this respect our other newsflash: