Luxembourg Tax Alert 2023-07

On 26 May 2023, the Luxembourg administrative court (Tribunal administratif) issued a judgment; confirming the decision of the director of the Luxembourg tax authorities (LTA) to deny the status of permanent establishment (PE) to the branch of a Luxembourg resident company established in the U.S. (Trib. administratif, 26 mai 2023, n° 45030).

This judgment was delivered on the basis of the old § 16 of the Tax adaptation law (StAnpG) applicable before 1 January 2019 and an economic appreciation of the situation of the U.S. branch. 

In 2013, the complainant established a branch in the U.S. with the intention to perform intra-group financing activities.

On 21 August 2013, the complainant filed a tax ruling request claiming the recognition of a PE in the U.S. Subsequently, on 9 September 2015, the LTA issued the tax assessments for the year 2013. Though this is not explicitly mentioned in the judgement, it appears that such tax assessments deviated from the tax return. On 22 December 2015, the LTA informed the complainant that no answer would be given to the ruling request as the company had already been assessed for the year 2013.

After several exchanges with the complainant, the tax office issued final tax assessments for tax years 2014 to 2017 on 11 September 2019, refusing the recognition of the U.S. branch as a PE. The director of the LTA declared inadmissible the claim filed with respect to 2015 municipal business tax and rejected the rest of the claim on the facts on 26 June 2020. As a result, on 25 September 2020, the complainant brought the case to the administrative court. 

The law of 21 December 2018 having transposed into the domestic tax law of Directive (2016/1164) of 12 July 2016, referred to as the Anti-Tax Avoidance Directive, modified the domestic definition of PE.

§16 StAnpG defines the concept of PE under Luxembourg domestic law. The law of 21 December 2018 added provisions regarding the definition of PEs when they are located in countries that have concluded a tax treaty with Luxembourg. The law of 21 December 2018 also amended the StAnpG by adding a new §16(5), which is designed to resolve conflicts in interpretation regarding the existence of a PE that could arise from the interaction between domestic law provisions and those of the relevant tax treaty. The judgment under review is, however, based on the previous version of §16 StAnpG.

The court reaffirms what constitutes a PE according to the double tax treaty with the U.S., mentioning the need for a place of business (i.e., a physical installation such as those listed in the treaty), which must be fixed (i.e., it must, have a link with a specific geographical point and be characterized by a certain permanence) and the that the activity of the enterprise must have been carried on wholly or partly from or through this fixed place of business.

The court highlights the fact that the complainant has not provided any evidence to support the claim that its financing branch was actually located in the U.S., and to rule out the notion that it is fictitious. In further details:

• The address of the alleged U.S. branch is not clearly identified, as the address in the office share agreement is different from the one in the form 8858 of the U.S. tax authorities, which in turn is not the one used in the framework of the service agreement
• No payment has been made by the U.S. branch under the terms of the office share agreement and the services agreement
• The persons mandated in the services agreement are some managers of the Luxembourg company, which therefore are supposed to manage the complainant itself, a Luxembourg resident corporation
• The opinion of a U.S. attorney – invoked and relied upon by the complainant – is not considered supportive of the position of the complainant by the judge. While stating that the company does indeed have a PE in the U.S., the U.S. attorney concludes that the company should not file a tax return in the U.S., as it has no “considerable, continuous, and regular” activity in the U.S. where it carries no “trade or business”
• The judge follows the view of the LTA according to whom it is not evidenced that the U.S. branch has its own bank account in the U.S. The court states that the documents submitted by the complainant are not conclusive in this respect, as that they are not official documents issued by a bank but documents issued by other companies in the group
• When the financing activity was put in place, the funds were transferred directly “in the interests of economic efficiency” without flowing through the alleged PE

The complainant failed to convince the judge that the level of substance it had in the U.S. through the alleged branch was sufficient to constitute a PE.

Another takeaway from this court decision relates to the discussions around the general principles of the European law invoked by the complainant, i.e., the principles of legitimate expectation and legal certainty.

The court focuses on the principle of legitimate expectation. The judge reminds that this notion protects the taxpayer against sudden and unforeseeable changes from the administration by recognizing his right to rely on conduct habitually adopted by the latter or on undertakings given by it and insists on the fact that the legitimate expectation requires an act or a decision to be created. In the present case, the judge rejected the applicability of this principle.

It seems – though the judgment is not explicit in this respect – that the complainant did not try to argue that the tax assessment issued in 2015 with respect to the tax year 2013 created a legitimate expectation for him. We can infer from this apparent silence that such tax assessment was not in line with the tax returns filed for year 2013 and thus did not accept (even if tacitly) the recognition of a PE. The judgment of the court could indeed have been different if the 2013 tax assessment had recognized the existence of the PE.

Being very facts and circumstances driven, it does seem that this judgment should be considered as a landmark decision, all the more since the legal basis, i.e., §16 StAnpG has been reinforced since then. We understand that an appeal was filed by the taxpayer and it will be interesting to see whether the Luxembourg supreme court in direct tax matters (Cour administrative) will follow the ruling of the Luxembourg administrative court . In any event, it is an interesting read to see the type of economic analysis performed by the judge for the recognition of a PE, but also when it comes to the requirement of an act or a decision for the principle of legitimate expectation to potentially apply.