Luxembourg Tax Authorities issue guidance on administrative fines related to tax infractions and procedures applicable to criminal tax offenses

On 28 July 2021, the Luxembourg Tax Authorities (LTA) published a Circular setting forth general guidelines for setting administrative fines and penalties for specific infractions in a direct tax context. The Circular also clarifies the procedures to be applied for criminal tax offenses and how tax offices should cooperate with the judicial authorities. 

Detailed discussion

General

Several provisions of the Luxembourg General Tax Code (Abgabenordnung, AO) were amended in December 2016 by reinforcing the tax administration’s powers to levy fines and penalties in the case of taxpayers violating their obligations. The Circular issued by the LTA on 28 July sets forth general guidelines to be observed when setting administrative fines for specific infractions in a direct tax context, how to distinguish between administrative infractions and criminal offenses, as well as the process to be applied if a criminal offense is detected.

Administrative fines

Incomplete or inaccurate tax returns (art. 166 (3) AO)

When completing specific forms as well as upon request in certain other circumstances, taxpayers have to assert that they have provided all information to the best of their knowledge and belief. Under the law, any intentionally incomplete or inaccurate declaration or any non-declaration is subject to an administrative fine, amounting to a minimum of 5% and a maximum of 25% of the avoided taxes or undue reimbursement.

The provision intends to sanction intentional omissions and inaccuracies in tax returns as well as the omission to submit tax returns by taxpayers. It requires taxpayers to be acting intentionally. Whether the taxpayer had the intention to submit an incomplete or inaccurate tax return or to not submit a tax return (intentional oversight) must be assessed based on the entirety of the underlying facts and circumstances (to be analyzed in comparison to the behavior of an ordinarily diligent taxpayer).

The Circular points out that a fine on the basis of art. 166 (3) AO requires that the tax be established. This provision is not applicable in case of tax audits.

“Simple” tax fraud (art. 396 (1) AO)

The General Tax Code covers three types of tax fraud, namely simple tax fraud,

aggravated tax fraud and tax evasion. Simple tax fraud is the least serious and is subject to an administrative fine. This provision applies where a person fraudulently obtains an undue tax advantage for his/her own or for somebody else’s benefit, or on purpose causes a reduction of tax revenues. The administrative fine is between 10% and 50% of the avoided taxes or undue reimbursement.

The fine requires an unjustified tax advantage having been granted or a tax debt having been determined that is lower than the amount that would have been fixed had the actual situation been established.

Involuntary tax fraud (art. 402 (1) AO)

Where a taxpayer, his/her representative or another person dealing with the affairs of a taxpayer negligently causes tax revenues to be reduced or tax advantages to be unduly granted or maintained, he/she is subject to a monetary fine that amounts between 5% and 25% of the avoided tax or undue reimbursement.

Contrary to art. 166 (3) AO and art. 396 (1) AO, this provision does not require an intentional act. The Circular points out specifically that this provision allows fines to be levied on representatives, particularly tax advisers that act as intermediaries between taxpayers and the LTA.

Procedure

Fines for the above-mentioned infractions are levied by the competent taxation office and are subject to the same appeal procedure as tax assessments. The Circular sets forth a framework for levying fines in order to ensure a uniform approach by the tax offices.

The tax offices can levy administrative fines every time the conditions for an administrative fine are met. The determination of the amount of the fine constitutes a discretionary decision that can be appealed in front of the Director of the LTA.

Every fine must be justified by its circumstances. The head of the tax office must ensure an effective and explicit assessment of the particular circumstances in fairness and expediency as a basis for his/her decision. As the determination of a fine always constitutes a discretionary decision, there can be no general rule or particular exception given. In exercising their power of assessment, the tax offices have to fix the fine such that it is appropriate to the circumstances and proportionate to the infraction and to the taxpayer's taxpaying capacity. In exercising their legally prescribed discretion, the tax offices will have to take into account all the elements and information in their possession.

While the tax offices have a margin of discretion in determining the amount of the fine to be imposed, the law provides for minimum and maximum amounts of administrative fines that must be strictly respected.

The date when the decision to impose a fine based on art. 166 (3) AO, art. 396 (1) AO and art. 402 (1) AO is notified is relevant for: (i) the deadline to pay the fine (one month); and (ii) the deadline to file an appeal. As fines are notified by registered letter, notification takes place on the third day (not the third working day) after the date of posting. The Circular states that in all three cases of administrative fines, the law refers to the possibility for the taxpayer to file a formal “appeal” (Anfechtung) and not a “hierarchical complaint” (Beschwerde). The decision fixing the fine that is notified to the taxpayer must indicate the means of appeal.

Criminal tax offenses and cooperation with the judicial authorities

Aggravated tax fraud and tax evasion (arts. 396 (5) and (6) AO)

As mentioned above, the General Tax Code covers three types of fraud: Simple tax fraud, aggravated tax fraud and tax evasion. While simple tax fraud constitutes an administrative infraction, aggravated tax fraud and tax evasion are criminal tax offenses.

Aggravated tax fraud is (as the name suggests) more serious than simple tax fraud and requires an amount of tax avoided or unduly reimbursed higher than one quarter of the annual tax actually due, but not less than €10,000, or annual tax avoided or unduly refunded to be at least €200,000. The seriousness of the offense is determined by the amount of the tax fraud. It does not require the systematic use of fraudulent actions to conceal relevant facts from the authorities or to persuade them of incorrect or inaccurate facts. It is punished by imprisonment between one month and three years and a monetary fine between €25,000 and an amount representing six times the taxes evaded or unduly refunded.

Tax evasion is the most serious infraction and is characterized by two elements:

• A significant amount being involved, either in absolute terms or in relation to the annual tax due.
• The systematic use of fraudulent actions to conceal relevant facts from the authority or to persuade it of incorrect facts.
   

Tax evasion is punished by imprisonment between one month and five years and a monetary fine between €25,000 and an amount representing 10 times the taxes evaded or unduly refunded.

According to the Circular, the thresholds make it possible to quantify objectively when the scale of the fraud is sufficiently material for the sanction to become criminal in nature. As per the Circular, there are several levels:

• If the fraud relates to an amount below €10,000, there is no aggravated tax fraud. This first level eliminates smaller cases that are always considered an administrative infraction.
• Fraud involving amounts of more than a quarter of the annual tax due/refund actually due but not less than €10,000 constitutes aggravated fraud. This second level is designed to punish fraud that, in absolute terms, may be considered small, but is material in relation to the amount of the tax due.
• Fraud involving an amount of annual tax avoided or unduly reimbursed exceeding €200,000 always constitutes aggravated tax fraud, except in the presence of fraudulent actions, in which case the offense is to be qualified as tax evasion.

Where no amended tax assessment is issued but tax was underreported, the amount of tax avoided results from a comparison between the tax due according to the tax return and the amount of tax as assessed. Where an amended tax assessment has been issued the amount of tax avoided results from a comparison between the tax as per the original tax assessment and the amended tax assessment.

In both cases the head of the competent tax office must transfer the proceedings to the State Prosecutor who initiates prosecution.

Reporting to the public prosecutor and cooperation with the judicial authorities

Cooperation between the LTA and the judicial authorities is regulated by a specific legal provision (art. 16 of the Law of 19 December 2008), which constitutes an exception to the general rule of tax secrecy. The Circular sets forth guidelines to be followed by the competent tax offices in implementing and operating this cooperation in practice.

Obligation to comply with requests from judicial authorities

The judicial authorities and the Financial Intelligence Unit (FIU) may request information from the LTA, which the tax offices must provide.

Obligation to report crimes and offenses to the State Prosecutor

The tax office is obliged to report to the State Prosecutor:

• Cases of aggravated tax fraud and tax evasion (see above)
• Crimes and other serious acts of general public interest, and in particular all facts or indications discovered in the course of the taxation procedure that relate to money laundering, corruption, and terrorist financing
• All other ordinary offenses and crimes discovered in the course of taxation and recovery proceedings (e.g., fraud, evasion, forgery, breaches of commercial law, lack of adequate authorization and other breaches of the law of establishment, in particular accountants operating without the required authorization)

The report is to be sent to the State Prosecutor at the competent tribunal as soon as the facts are established by the tax office. Any document, report or other evidence relating to the facts and evidence discovered must be attached to the report.

Transmission of information by the State Prosecutor and the FIU

The judicial authorities shall transmit to the LTA any information that may be useful for the correct establishment and recovery of taxes, duties, fees, and contributions whose collection is assigned to them.

When such transmission takes place the tax offices are obliged to process and use the information. If the analysis of the file and the information transmitted by the judicial authorities and the FIU allows the determination that there is fraud:

• A fine must be imposed in the case of simple tax fraud.
• A report must be made to the Public Prosecutor’s office in the case of aggravated tax fraud or tax evasion.
   

Obligation to report suspicious transactions in accordance with the Anti-Money Laundering and Anti-Terrorist Financing Law

A suspicious transaction report must be sent to the FIU which is under the supervision of the State Prosecutor. The purpose of the FIU is to receive and analyze reports and other information on suspicious transactions that may be related to money laundering or terrorist financing.