Throughout the Luxembourg tax process, from the examination of tax returns by the Luxembourg tax authorities (LTA) to hearings in administrative courts, various procedural safeguards are in place to protect taxpayers’ interests.
One of these safeguards is the adversarial principle, which aims to ensure fairness and balance by guaranteeing taxpayers the right to be heard during the reassessment of their tax liabilities through the examination of tax returns and audits (collectively, the ‘tax audit process’). This fundamental principle is specifically recognised in the tax legislation. Section 205(3) of the General Tax Law (Abgabenordnung) provides that “[i]f deviations from the tax return are to be made, taxpayers must be informed in advance of the points where significant deviations to their disadvantage are possible, allowing them to express their views beforehand.”
This article examines how the LTA must comply with this principle during the tax audit process. It is important to note that any breach of this principle by the LTA may lead to the annulment of additional tax adjustments.
Insights based on Luxembourg Administrative Court rulings
Due to the lack of specific formalities in Luxembourg tax law regarding the practical application of the adversarial principle, the question arises as to how the LTA should proceed to comply with this principle during the tax audit process. In recent years, the Luxembourg Administrative Court has provided useful insights in this regard (Administrative Court decisions of June 15 2023, No. 48144C; January 11 2024, No. 48770C; July 11 2024, No. 49177C–49685C; and January 30 2025, No. 50349C).
The LTA have generally argued that, as long as there were exchanges of correspondence between them and the taxpayer, the adversarial principle was generally respected. For instance, in one case, the LTA considered an extensive exchange of correspondence between the tax office and the taxpayer sufficient to respect the adversarial principle.
However, the Administrative Court found that the LTA could not limit the application of this fundamental principle to a purely material exchange of documents. The court clarified that, to effectively guarantee this right, the LTA had to ensure that taxpayers were sufficiently informed of the proposed corrections increasing their tax liability and could respond in an informed manner. The court’s approach relied on an examination of each piece of correspondence from the LTA that was unfavourable to the taxpayer.
In this respect, the LTA must communicate their findings appropriately. As the format of this communication is not predetermined, the LTA may choose any form. However, the LTA must prove that their findings have been effectively communicated to the taxpayer. Therefore, in practice, the communication may be in the form of letters, audit reports, or meeting transcripts. The LTA must also inform taxpayers of their right to respond to the communication.
Moreover, to respond in an informed manner, taxpayers should be able to understand the basis for the proposed adjustments that increase their tax liability. For instance, the LTA cannot simply invoke ‘usual margins’ in an industry to increase the revenues of a taxpayer operating in the same sector. On the contrary, the LTA must provide explanations regarding the origin of the retained margins and the comparison factors that led them to conclude that these margins correspond to those typically found among a sample of establishments comparable to the one operated by the relevant taxpayer.
Furthermore, the LTA should allow reasonable time for taxpayers to contest. For example, the LTA cannot refuse an extended deadline for the taxpayer to respond to the LTA’s last correspondence proposing additional tax adjustments not mentioned previously. Similarly, if the LTA’s proposed adjustments are based on grounds that are different from those initially stated, taxpayers should be granted an appropriate period of time to respond to them.
It is essential for taxpayers to effectively navigate the tax audit process and ensure that the LTA do not violate this procedural requirement, which could result in the cancellation of additional taxes.
Potential reform of the Luxembourg tax procedure
Although the legislative reform of the Luxembourg tax procedure has been under discussion for some time, any new legislative measures should incorporate the trends identified by the administrative jurisdiction to streamline the tax audit process and ensure fair treatment of taxpayers.
