The findings are part of an ongoing study into Luxembourg tax audits coordinated by Julia Sinnig, a postdoctoral researcher at the ADA chair in financial law at the University of Luxembourg, and Fatima Chaouche, a university lecturer and law clerk at the administrative court of Luxembourg, for the Cahiers de fiscalité luxembourgeoise et européenne, a law journal published by the University of Luxembourg.
Sinnig said their research aims to address important gaps in Luxembourg’s tax rules concerning taxpayer audits. Current legal provisions for taxpayers that are audited are severely lacking, with no administrative guidance whatsoever, she explained. “Because the law is general, this situation leaves great discretion to the administration to organise tax audits,” she said.
Sinnig said their study was ongoing--with no definitive conclusions yet reached--and that more public information was needed on how exactly tax audits are conducted. “This administrative practice is very much unknown and we wanted to understand it better--hence our study. This will allow us to assess whether such administrative practice is in line with the law and eventually suggest regulatory remedies.”
In order to better understand taxpayers’ experience with the tax authorities, the pair of researchers are inviting taxpayers who have been subject to a tax audit to participate in an anonymous questionnaire. The questionnaire, which is only available in French, closes at the end of June.
A more concrete regulatory framework will give taxpayers the power to not accept a tax assessment as given, to be aware of their rights and to make sure they are enforced on an administrative level, and not just when it goes to a judge.
Audits are a burden on taxpayers
The research comes as parliament reviews a draft bill that will amend the Luxembourg General Tax Law and introduce new procedures that are applicable to taxpayers. The bill seeks to simplify and modernise rules governing the tax procedure in Luxembourg, but some legal experts believe certain provisions diminish taxpayer rights.
Unlike other foreign tax systems, tax declarations submitted to Luxembourg’s tax authorities do not benefit from a presumption of regularity and the tax administration must verify each case based on the individual circumstances. As a result, when tax authorities want to challenge a tax declaration and issue a tax audit there is little recourse for the taxpayer.
The study shows Luxembourg taxpayers that are subject to an audit often have no choice but to comply--and pay more taxes--the only other alternative being to go to court and challenge the tax authorities. “It is quite a burden on taxpayers. There are many obstacles to challenge the tax assessment and, in many cases, when the difference is relatively small, it is just easier to accept paying more,” Sinnig said.
Providing a more transparent legal framework for taxpayers will not only restore taxpayers’ legal rights, but also ease the administrative burden on the tax authorities, Sinnig explained. “A more concrete regulatory framework will give taxpayers the power to not accept a tax assessment as given, to be aware of their rights and to make sure they are enforced on an administrative level, and not just when it goes to a judge.”
According to a report from Luxembourg’s inland revenue office, the Administrations des Contributions Directes--one of three tax authorities in Luxembourg--49 tax audits were concluded in 2022, while 81 audits are still pending.
Taxpayers left in the dark
In one case reviewed by the study, a restaurant in Luxembourg that had been subject to a tax audit by the Luxembourg tax authority filed an appeal with the administrative tribunal, which hears appeals on direct taxes. The judgment showed the tax authority had sent a letter to the restaurant informing them they will increase their taxable profits by virtue of comparing their profit margins to those considered “usuelles,” French for ‘ordinary’, in comparable restaurants. However, the tax administration never revealed what it considered as ‘ordinary’ margins, since these are protected by accounting secrecy.
As a result, the restaurant was left in the dark as to the precise calculations applied by the tax authority. It was only when the restaurant brought the case before the tribunal that they were able to access the relevant data and appeal the decision.
In this case, the tribunal ruled in favour of the taxpayer, stating that the tax administration “did not respect its obligation to inform the taxpayer about what it considers to be ordinary profit margins.” “By withholding this information, the taxpayer was put in a worse position to defend themselves,” Sinnig said.
The case is still pending in front of the administrative court and will be subject to another final judgment.
Taxpayers forced to sign waiver
In another case flagged by the researchers, the tax authorities allegedly forced a taxpayer to sign a waiver so that they could extend the length of time they could spend working on their investigation. According to a legal judgment, access to an audit report is said to have been withheld from the taxpayer until they signed the waiver.
“During our study, various sources have confirmed that this issue, in practice, does happen and that taxpayers are not always informed of the consequence of what they sign, particularly when it comes to allowing the tax authorities to audit for an extended period of years that would normally have been excluded for the tax audit,” Sinnig said.
Delano asked the finance ministry if they would like to comment or participate in an interview on tax audit procedures.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.