Criminal tax offences and tax disputes in Luxembourg

This guide examines the legal threshold for tax evasion offences, the auditing powers of authorities, and the settlement, dispute resolution and appeals processes.

It is not intended to provide extensive analysis of the different aspects of tax procedure, but rather a pragmatic summary of the basics.

Establishing a criminal tax offence

In Luxembourg, a criminal tax offence consists of two elements, set out in section 396 of the Abgabenordnung Vom 22 May 1931 (AO). Both of these must be present for an offence to have taken place:

• a material element - obtaining an unjustified tax advantage for the taxpayer or for another person, or a reduction in tax revenue, or using assets benefitting from exemptions or tax advantages contrary to the purposes of the law providing those exemptions or advantages.
• a moral element - intentionally triggering the advantages or intentionally omitting to inform the tax authorities on inappropriate uses of assets benefitting from exemption or advantages. 

For the material element to exist, it is sufficient that a lower amount of tax has been established or that a tax advantage has been unduly granted or retained because of the offence. Whether the amount of tax that would otherwise have been paid should have been reduced for other reasons or whether the benefit could have been claimed for other reasons is irrelevant.

• Navigating corporate and partnership tax in Luxembourg

As of 2017, aggravated tax evasion and tax fraud and attempts to commit these offences are criminal offences applying to direct taxes, VAT, and registration duty and gift tax.

Investigating and prosecuting tax evasion and fraud

The tax authorities must act within 10 years of issuance of the tax assessment or, for ‘attempted’ tax evasion, within 10 years of the filling of a tax return when no tax assessment has been issued.

A criminal investigation can be prompted by a referral to the Public Prosecutor’s Office by the tax authorities; by another authority or service provider such as a bank, statutory auditor, accountant, domiciliary or lawyer; or on referral from the Public Prosecutor’s Office itself. The Public Prosecutor’s Office will decide on next steps which may include requiring an investigating judge to open a preliminary investigation; deciding whether to continue the proceedings; or closing the case.

If there is sufficient evidence, the prosecutor can issue a summons (‘citation à prévenu’) to the taxpayer.

There is also a procedure called the ‘jugement sur accord’, where the prosecutor attempts to negotiate a common position on penalties with the taxpayer. This procedure is only available in aggravated tax evasion or tax fraud cases and is not frequently used in practice.

Auditing of corporate tax returns 

How often taxpayers are audited after a return is filed, and whether the tax authorities need to have any justification to commence an audit, depends on the nature of those returns and the complexity of the operations and transactions carried on by the taxpayer. In principle, no justification is needed before the tax authorities can review the taxpayer’s corporate tax returns in detail. In practice, the tax authorities will start an audit when they are suspicious of elements in a tax return, or elements of a return are not filed on time or at all or are wrongly filed. Large amounts or non-straightforward transactions may also catch the eye. The tax authorities can also investigate following communications from other tax authorities or after DAC 6 reporting. 

The frequency of and justification for VAT audits also depends on the taxable activity carried out by the business. In practice, inspections are frequent. They may involve simple checks, in which case the inspection is relatively brief, or on-site observations or in-depth inspections. The VAT agent will issue a detailed report summarising their findings and the observations made by the taxpayer.  

No code of conduct in relation to audits has been published by the Luxembourg tax authorities. Taxpayers may instead rely on general tax principles to which the tax authorities are subject, for example the taxpayer’s right to a hearing, the non-retroactivity principle, proportionality principles, legality of taxation, equality of taxation. At the same time, the tax authorities should remain objective in their audit and reassessments. 

Tax authority information powers 

Under Luxembourg tax law, particularly §171 to 175 of the AO and the Income Tax Law, the Luxembourg tax authorities have broad powers to:  

• request documents, records, and explanations from taxpayers and third parties such as banks, employers and service providers;  
• conduct on-site inspections and audits; and 
• access electronic communications, including emails, if they are relevant to determining the taxpayer’s obligations. 

Requests must be proportionate and justified and must comply with data protection laws, including the GDPR.

Any emails requested must not contain sensitive personal data that would breach GDPR provisions. In practice, this often involves requesting emails from business accounts rather than private ones, unless the private account is used for business purposes. Any request for email data must adhere to the principle of proportionality, meaning the scope of the request must be strictly necessary and appropriate for the purpose of the investigation.

The tax office must only require evidence which it can reasonably assume is available to the taxpayer or that would be “reasonably accessible” if the taxpayer attempted to gather it.

Information can be requested from third parties in certain circumstances, particularly where that third party appears to be the only source of the needed information. Third parties should provide information to the tax authorities where it is available, but are not required to proceed with specific investigations to obtain that information. Some third parties may rely on legal exemptions to such requests, such as close family members, members of the clergy, medical professionals, lawyers and financial institutions, or where there is a risk of self-incrimination. The obligation to disclose can be very broad if it concerns all information that might be useful to the tax authorities in finalising the tax due. The information should be given in the form required by the tax authorities and supporting documentation could be required.

In some cases, taxpayers are not required to be informed of the request made by the tax authorities to a third party.

Settlement and appeals 

Before going to court, there is an administrative phase during which the Luxembourg tax authorities and the taxpayer exchange their points of view. Often, this phase is sufficient to settle the points to be clarified. There is no binding agreement as such. The tax authorities issue a final tax assessment which reflects their position and, if the taxpayer agrees, the procedure stops here.  

The tax burden of the taxpayer must be grounded in law and the principle of legality, so there is no room for negotiation in respect of the tax to be paid. However, there may be room for negotiation on the characterisation of the facts and the relevant the tax treatment. For example, if some expenses should be considered either as in relation to the professional activity of the taxpayer, and therefore deductible, or as personal and therefore non-deductible. The purpose of any agreement is to avoid litigation and ensure fair taxation.  

The taxpayer can challenge the tax assessment issued by the Luxembourg tax authorities within three months of issuance by introducing a claim in front of the Directeur des contributions of the competent tax office or the relevant VAT office.

Litigation of tax disputes

The competent courts

Tax litigation in Luxembourg is divided between the administrative courts and the civil courts. Income tax, corporate income tax, wealth tax, municipal business tax, property tax and disputes concerning withholding taxes fall within the jurisdiction of the administrative judge, in the Administrative Tribunal in the first instance and the Administrative Court in the second instance. VAT, registration fees, gift tax, inheritance tax, customs duties, excise duties, the various taxes levied by the state, such as the tax on motor vehicles, the cabaret tax and the tax on sports betting, as well as remunerative municipal taxes, fall within the jurisdiction of the civil judge in the Judicial Tribunal, Court of Appeal and finally the Court of Cassation. 

Administrative delay stage

The taxpayer has three months to contest decisions taken by the Luxembourg tax authorities to the Directeur des contributions of the competent tax office or the VAT office, or the Director of VAT if the dispute is about VAT matters. This administrative phase is mandatory, and intended provide the tax authorities and the taxpayer with an opportunity to resolve the conflict without the costs and burdens of pursuing litigation.  

If the director rejects the administrative claim, a judicial claim may be filed within three months of notification of that rejection. If the director does not reply within six months of the introduction of the claim, the taxpayer can also introduce a judicial claim without time limit. The right of appeal to judicial institutions arises only in matters concerning the tax base in which the director has competency.  

In direct tax matters, if the Administrative Tribunal’s decision is unfavourable, the taxpayer can appeal to the Administrative Court within forty days. Legal representation is required at the appeal stage. The litigation process in Administrative Court is primarily written, involving the exchange of legal briefs. In urgent cases, taxpayers may request interim measures, such as the suspension of enforcement. The procedures are governed by strict deadlines and formal requirements, and legal or professional representation is often necessary to navigate the process effectively. 

In indirect tax matters, if the complaint is rejected or if the director fails to respond within six months, the taxpayer may bring the case before the District Court. The court will then examine the legality and merits of the tax decision.  

The procedure

The civil litigation procedure in tax matters is formal and requires strict adherence to deadlines and procedural rules. Legal representation is highly recommended, although not always mandatory in the initial stages.  

The taxpayer must continue to pay the contested tax during the litigation process, and any adjustments will be made depending on the outcome of the case. The initiating petition must meet specific content requirements and be submitted within a defined time frame. It must comply with both formal and substantive conditions, otherwise it will be deemed inadmissible.  

Judicial court hearings in VAT cases may be public depending on the nature of the case and the discretion of the court.  

Hearings in relation to direct taxation disputes are public, but the majority of the decisions are published after being anonymised. The court’s deliberations are not conducted in public.  

Tax procedure before the administrative judge is written. Only what is written in the brief (‘mémoire’) is taken into consideration. Additional oral observations are not admissible.  

Regarding the judicial procedure, the rules of the New Civil Procedure Code (Nouveau Code de Procedure Civile) are applicable. The procedure is also written.  

Luxembourg tax authorities’ decisions enjoy a presumption of legality until a judge decides differently, so the taxpayer is not permitted to defer payment of a tax debt by exercising the right to appeal. If the taxpayer decides not to pay, the Treasury may commence recovery procedures.  

Regarding VAT, the notification of the reassessment triggers the obligation to pay the VAT due, even where the taxpayer has opened a legal challenge.  

Discovery 

In Luxembourg tax litigation, there is no formal discovery process comparable to common law jurisdictions. However, the courts and tribunals adhere to the principle of “contradictory” (‘principe du contradictoire’), which requires that parties disclose to their opponents the documents and evidence they intend to rely on during the proceedings.  

While parties are not obliged to produce all documents in their possession, they must submit those that are relevant and useful to the resolution of the dispute. Each party is required to provide the court with all documents supporting its claims, and any document referenced in written submissions must also be made available to the opposing party.  

Importantly, the court will not consider the rights of the defence to have been violated if the opposing party was given an opportunity to respond orally to newly introduced documents and if both parties were able to freely discuss these documents during the hearing.  

Witnesses 

Witnesses can be called to give evidence in front of the administrative or judicial jurisdiction. Testimony statements may also be used, for example to prove the tax residency of a taxpayer.  

Burden of proof 

The burden of proof of the facts triggering the tax liability is on the tax administration while the proof of the facts releasing the taxpayer from a tax liability or reducing a tax rating is on the taxpayer. Responsibility for the regularity of the tax procedure lies with the administration. 

Timing

It took between 17 to 23 months to conclude an appeal in front of the Administrative Tribunal in 2023-24 and 163.4 days to conclude an appeal in front of the Administrative Court in 2024. 

Representation 

According to the administrative procedure, in first instance before the tribunal, legal representation is not mandatory. However, representation by a lawyer (Avocat à la Cour) is mandatory before the Court of Appeal. In front of the judicial jurisdictions, a lawyer is always mandatory. 

Costs 

The unsuccessful party is ordered to pay court costs, however, each party must, irrespective of the outcome of the proceedings, bear its own legal fees which represent a more substantial amount. In certain cases, and on request, the administrative judge may award a procedural indemnity (‘indemnité de procédure’) to the winner to cover the lawyer cost.  

Alternative dispute resolution 

Mediation is possible in the international context when there is a litigation involving at least two different jurisdictions. For instance, the Law of 20 December 2019 provides a tax dispute settlement mechanism and there is a mutual agreement procedure provided for in the bilateral tax treaties concluded by Luxembourg. 

Appeals 

For litigation brought before the administrative jurisdiction, the decision of the Administrative Tribunal can be appealed before the Administrative Court which is the last level of jurisdiction.  

For litigation before the judicial jurisdiction after bringing the case to the Court of Appeal, the last level of jurisdiction is the Court of Cassation.  

The “remise gracieuse” is another procedure which is a discretionary tax relief mechanism that allows taxpayers to request a partial or total waiver of a tax debt without contesting its legality, based on principles of fairness and equity. The procedure is governed by §131 of AO. It allows the Director of the Administration des Contributions Directes or their delegate to grant a tax waiver or refund if the collection of the tax would result in undue hardship. The chance of success is low.  

Penalties 

Other than in cases involving tax evasion or fraud, for late declarations or payments, the following penalties may apply:  

Regarding direct tax 

In the event of non-compliance with a tax return filing deadline, the tax office may charge the taxpayer or the debtor of the tax a supplement of up to 10% of the tax (§168 AO).  

In addition, in the event of non-submission of the various returns within the time limit, the tax office may impose on the taxpayer or the person liable for payment of the tax a financial penalty up to €25,000 (§202 AO).  

Penalty payment  

Fines for intentionally incomplete or inaccurate tax returns could amount to between 5 and 25 % of the taxes evaded. The law specifies that the taxpayer’s intention is required. Penalties for absence of filling of tax returns may also apply.  

Late payment interest  

The taxpayer may request a delay for the payment of the tax debt to the Luxembourg tax authorities. If such request is accepted, the following interest will be applicable: 

• no interest when the payment occurred within 4 months;  
• 0.1% per month for the period between 5 to 12 months after the tax is due;  
• 0.2% per month for the period between 13 months to 3 years after the tax is due;  
• 0.6% per month for the period exceeding 3 years.  

If no extension to the deadline for payment is agreed, the 0.6% interest rate applies.

In the event of non-payment of the tax debt on its due date, default interest is calculated not only on the tax due, but also on the surcharge due for late filing of the tax return.  

In VAT matters, penalty amounts vary from €250 to €10,000 per offence.  

Fines for late payment may not exceed 10% of the tax in arrears per year. They are payable within one month of notification of the written decision, notwithstanding the exercise of a right of appeal.  

In case of late communication of some information to the VAT authorities, penalties can also apply for a maximum of €25,000 per day late.  

Penalties of 10 to 50% of the amount of VAT evaded or undue refunds received can also apply in some cases.  

Mitigation

Penalty mitigation is established on a case-by-case basis and depends on the circumstances of each taxpayer. The taxpayer’s financial circumstances could be a mitigating element, or sickness or an accident could also justify late filing. 

A version of this guide was originally published by Legal500.