Luxembourg Tax Alert 2023-14

On 29 September 2023, the Luxembourg administrative court of first instance (Tribunal administratif) confirmed the tax adjustment carried out by the Luxembourg tax authorities (Administration des contributions directes – “LTA”) denying the recognition of a foreign permanent establishment (“PE”) within the meaning of the double tax treaty between the United States (“US”) and Luxembourg, thus nullifying the tax ruling previously granted to the taxpayer (Trib. administratif, 29 septembre 2023, n°46470).

The complainant is a Luxembourg-based company (“Company”). 

On 21 September 2016, the tax office informed the Company about its intent to challenge the tax return filed for the fiscal year 2013. The disagreement concerned the existence of a PE located in the US (and therefore the Luxembourg exemption of the profits and wealth reportedly allocated to it). 

On 15 November 2016, the Company sent to the tax office an amended tax return for 2013 as well as a revised balance sheet to effectively attribute to the US branch a dividend in kind that was one of the aspects discussed in the case. The LTA, however, denied the existence of any PE abroad, and consequently refused to proceed to any correction of the tax assessment issued.

On 27 December 2016, the complainant filed an administrative claim (réclamation) to which the Director of the LTA failed to answer. Faced with the Director's silence, the Company decided to file an appeal with the Luxembourg administrative court of first instance. 

This decision illustrates once more¹ that when it comes to establishing the presence or not of a foreign PE, the judge conducts a thorough examination of the facts and the evidence brought by the taxpayer to support his claim. 

This judgement goes one step further though, as it takes place in a context where a tax ruling had been granted by the LTA. In 2013, the LTA issued a tax ruling confirming that the US branch of the complainant had the required substance to qualify as a PE within the meaning of the double tax treaty between Luxembourg and the US with the express condition that, based on the rule of good faith, the tax ruling should no longer be valid if either: (i) the facts or circumstances described therein were incomplete or inaccurate, (ii) the key elements of the actual transaction differ from the description provided in the request for information or (iii) the decision is no more compliant with the national or international law.

This judgement clearly underscores that a tax ruling, by itself, does not shield a taxpayer from scrutiny by the LTA. In the context of PEs, the LTA consistently requests the submission of evidence proving the actual existence of the PE, hence the importance of preemptively documenting such structures.

¹ Please refer to our newsletter on the judgment of 23 May 2023, n°45030 Luxembourg Tax Alert 2023-07 - KPMG Luxembourg

While the court acknowledged that the taxpayer benefited from a tax ruling recognizing the existence of a PE in the US, it hastened to clarify that such tax ruling is not automatically applicable and that it was granted based on a specific situation described by the taxpayer at the time of the request.

The court also noted that the tax ruling contained several express reservations, meaning that certain conditions or limitations were explicitly specified in the tax ruling.

To decide on the case, the judge followed the same approach as the LTA and focused on verifying whether the situation at hand factually matched with the one initially described by the taxpayer, based on which the tax ruling was granted. The judge noted inconsistencies between the documents provided by the complainant and the description of the facts in the tax ruling, as well as between the documents themselves. 

The court therefore concluded that it was not established unequivocally that the key elements of the transaction corresponded to those described in the tax ruling request. Consequently, the LTA were under no obligation to honor the tax ruling, particularly with regards to the recognition of the US branch as a PE. 

Reading this judgement, it appears clear that the consistency and robustness of the legal documentation is absolutely key.