Rising tax controversy in Luxembourg underlines need for better tax risk management

According to the latest figures from the Luxembourgish Ministry of Finance, the number of tax controversy cases has increased: appeals have risen 50% over the past decade. This, coupled with upcoming legislative changes underlines the need for better management of tax risk.

The current tax controversy landscape

On 30 March 2023, the Luxembourg Ministry of Finance published its annual activity report for the year 2022. The report covers the activity of the administrations under its supervision, such as the Luxembourg direct tax authorities (Administration des contributions directes) which is mainly responsible for the determination and collection of direct taxes. The findings confirm what taxpayers and tax professionals observe in practice: a considerable rise in challenges to taxpayers' filing positions, entailing an increasing number of appeals filed against tax assessments.

As the report reveals, the number of tax appeals filed per year reached its peak in 2022: more than 1,650 appeals were lodged in 2022 at the level of the Director of the Luxembourg direct tax authorities (compared to approximately 1,600 appeals in 2021). On average, this marks a significant rise of 51% between 2013 and 2022. Similarly, the number of newly introduced tax disputes in front of the administrative courts has risen from 221 cases in 2021 to 275 cases in 2022.

As mentioned in the report, the topics involved in these cases have become increasingly complex and concern a variety of issues related to taxation, calls in warranty or exchange of information, at both the national and European level.

The report also indicates a 20% decrease in the total number of advance tax rulings processed in 2022 compared to 2021. The decrease in advance tax rulings shows a possible taxpayer reluctance to request such rulings, which consequently heightens the possibility of discussions with tax authorities and tax controversy disputes arising from divergent interpretations of tax laws that were not clarified beforehand.

Expected changes

The procedure in direct tax matters requires the taxpayer to first file an appeal against a tax assessment or any other administrative decision in tax matters with the Director of the Luxembourg direct tax authorities. If the Director does not respond to the appeal within six months, the taxpayer can bring a claim in front of the administrative tribunal. Currently, there is no deadline within which the taxpayer must initiate proceedings.

A recent draft law intends to modify the procedure by introducing a time limit of 12 months, starting at the end of the aforementioned six-month period, to submit a claim in front of the administrative tribunal. This would then be extended by six months (i.e., to a total of 18 months) in case of an audit by the tax administration.

Once adopted, taxpayers will have to react much faster in order to defend their positions towards tax administration.

How to adapt to changing tax risks?

Considering the acceleration in the number of tax disputes and the upcoming legislative changes, the need for strong tax governance has emerged as a necessity for the effective management of tax risk and tax controversy. To avoid and, where required, to efficiently manage tax disputes, taxpayers must have a thorough understanding of the tax controversy process, should diligently review their tax assessments, monitor deadlines and establish robust tax litigation management strategies that cover all stages of dispute resolution, including prevention, management and resolution.