- The taxation procedure in the context of a company demerger
Until now, with respect to the demerger with the dissolution of capital companies, the position of the Direct Taxation Administration (Administration des Contributions Directes or "ACD"), as well as market practice, have been to declare a potential latent capital gain, discovered upon said demerger with respect to the split company and then to issue a taxation invoice to that company. At the same time, the ACD deemed that the stipulations of the demerger plan constituted agreements between private persons which were not enforceable against it, particularly as concerned the attribution of a tax liability arising from the discovery through the effect of the demerger of latent capital gains which did not fulfill fiscal neutrality requirements.
However, the Administrative Court of Appeals held for the taxpayer by holding that even if the tax debt originated in the split company, a company dissolved without liquidation may no longer be the addressee of a tax invoice (assessment), which should thus be sent to the rightful successor to which the demerger plan attributed the tax debt. In this context, the court thus recognised that the demerger plan stipulations are, through the provisions on the demerger procedure in the Law of 10 August 1915 on commercial companies, as amended, enforceable against any third party, including the tax authorities.
The court ruled that:
"[…] the law recognises a legal effect with respect to third parties and the distribution of the liabilities of the split company included in the demerger plan […], starting from the demerger’s effective date, the company to which the debt liability was assigned by that plan is to be considered the sole debtor of that debt."
It is only from the time that a third-party creditor does not obtain satisfaction of the debt from the rightful appointed successor that it can address its claim to the other entities resulting from the demerger.
Also, flowing from that is the interest in clearly defining in the demerger plan the attribution with respect to the split company’s assets and liabilities, to avoid any doubt on the issue. If the attribution of an element of the liabilities is not clearly defined in the demerger plan, a creditor may address its claim to all of the entities resulting from the demerger.
- No suspension of the statute of limitations vis-à-vis third parties which are not parties to a legal proceeding
The ACD had issued tax invoices addressed to a company resulting from a demerger for which the statute of limitations had clearly run out.
When the taxpayer raised the issue of prescription, the ACD argued for a so-called suspension of the statute of limitations during the course of the litigation before the administrative courts with respect to the first tax invoices which had been issued beforehand, addressed to the split company and cancelled in the prior litigation by the Administration Court.
It this context, the two levels of the administrative court ruled that such an suspension effect could not in any case exist vis-à-vis an entity that had not been party to the proceeding related to the prior litigation.
- The obligation to inform the taxpayer prior to the issue of tax statements incumbent upon the ACD
In one case, following the sale of a building considered by the sellers as their principal residence, the application of a capital gain exemption was rejected by the ACD.
However, the provisions of the General Tax Law (Abgabenordnung or "AO") require that the ACD inform the taxpayer, prior to the issue of tax invoices, of all of the factors on which the ACD relies in contemplating diverging substantially from the tax return.
Those provisions thus are useful in allowing the taxpayer to take a position with respect to the adjustments contemplated by the ACD.
Here, the ACD sent the taxpayer tax invoices (assessments) treating the profit from the sale as a taxable capital gain without the ACD’s prior communication of such intent to the taxpayer.
Applying the AO, the administrative court ordered the annulment of tax invoices in question due to violation of the AO, and more specifically of the rights of defence and the principle of an adversarial process.
- Suspension of enforcement in tax matters
It is a tax law principle that an appeal, be it before the ACD Director or before a court, does not suspend the obligation to pay the tax amounts demanded.
There is an exception to this principle which consists of requesting and obtaining a stay of execution. The stay of execution can only be ordered upon the double requirement that (i) the execution of the appealed decision risks seriously and definitively harming the petitioner, and (ii) the grounds raised in support of the appeal against the contested decision appear serious.
Suffice it to say that obtaining such a stay is difficult and infrequent.
Nonetheless, in one case, it was shown that the immediate payment of the tax debt demanded, because of its scale, was such that it would cause not only serious but also definitive harm, given that such a payment would have irretrievably disrupted the taxpayer’s financial situation to the extent that it caused its bankruptcy.
Additionally, it was possible to demonstrate the seriousness of the taxpayer’s arguments, such that the Administrative Tribunal President was able to hold that the merits of the appeal had a solid chance of success.
The Administrative Tribunal President thus granted the stay of execution.
Tax lawyers at the heart of current developments in tax law
The above-mentioned decisions bring to light the role of tax lawyers in Luxembourg.
Because the toughening and multiplication of tax regulations at the international and European levels have such profound repercussions on national tax law, they are equally factors complexifying the rules in force and sources of legal insecurity leading to increased risk in tax litigation.
For over ten years, acronyms such as BEPS, ATAD 1, 2 and 3, , GAAR, to name but a few, have become essential to those who are directly or indirectly interested in taxation.
At the same time, one also notes an increasing number of direct and indirect tax lawsuits in areas as diverse as statements calling for guarantee activation, tax information exchange, the hidden distribution of profits and increasingly the abuse of law as well as collection litigation. Likewise, it is no longer at all rare to see forced collection implemented by the ACD as well as criminal prosecutions.
Thus, the image of the tax advisory lawyer comfortably seated behind his or her desk corresponds less and less to the reality of the market. Tax lawyers in 2022 can no longer afford to intervene solely in the advisory phase, they must henceforth put on their robes, go before the national or European administrative, civil or even criminal courts, to plead a taxpayer’s case.
Obviously, this implies thorough knowledge of the substantive tax rules, but also perfect mastery of the national and even treaty rules, the compliance with which is crucial in a country governed by the rule of law because this is no more and no less than the guarantee of taxpayers’ fundamental rights of defense.
Thus today, direct and indirect tax dispute resolution risk management must be at the heart of tax management for company tax directors, financiers and accountants.
As part of their everyday concerns, they would be wise to integrate potential questioning by tax authorities, and thus to maintain the appropriate documentation which complies with the current rules as a preventive measure as soon as any tax dispute arises.
Thus, Article 59 of the Law of 21 June 1999, on procedural regulations before administrative courts, as amended, provides that:
"The burden of proof of facts triggering a tax obligation is on the administration, the burden of proof of the facts releasing the tax obligation or reducing the tax rate is on the taxpayer."
Tax lawyers will thus continue to play an active role in advising on their clients’ investment or restructuring projects, but they will make sure not only to advise their clients on what "to do" but also on what "not to do".
The experience acquired in the field in pre-litigation resolution of tax disputes as well as knowledge of the jurisprudence thanks to a daily litigation practice are all valuable tools for tax lawyers in the effective resolution of tax litigation.