“Comfort letters” are officially called “advance tax decisions”. Essentially, they are pre-emptive tax opinions issued by tax authorities around the world. Since they clearly spell out a tax service’s future course of action, they provide ‘comfort’ to petitioners.
There are two types of advance tax decisions: advance tax rulings, written confirmation of how tax law will be applied to a taxpayer’s specific case; and advance price agreements, how transactions between different parts of a multinational corporation will be treated.
Companies and wealthy individuals seek the opinions from tax agencies before striking a specific deal to ensure they have correctly calculated the tax consequences of the arrangement. Comfort letters have been criticised by campaigners for being distortive and often unfair, and by the European Commission, which has said they sometimes amount to unlawful state aid. Public pressure mounted in the mid-2010s.
The number of advance tax decisions issued by Luxembourg Inland Revenue (ACD) each year dropped by 90% between 2015 and 2020, according to figures published by Luxembourg’s finance ministry. The ratio of positive replies to taxpayer requests was down by nearly a third over the same period: ACD granted 83%-85% of taxpayer requests in 2015-2017, compared to 59% in 2020.
Last year, those numbers crept up. The number of comfort letters increased by one-sixth. The ratio of positive replies to taxpayer requests rose by 10 percentage points between 2020 and 2021.
The recent uptick does not appear to indicate any particular trend. The variation was apparently down to the small number of comfort letters that are actually issued. A spokesman for the finance ministry told Delano: “In total 44 rulings were granted in 2020 and in 2021 it was a total of 58 rulings. The difference amounts to 14. There is no specific reason for this slight annual fluctuation.”
Previous jargon busters in the series: Alternative funds & Ucits funds; article 8 and article 9 funds; blockchain, crypto & NFTs; and carried interest.
Next week’s jargon buster: due diligence.