How the Luxembourg tax authorities should apply ex officio taxation

The Luxembourg Administrative Court recently issued notable decisions addressing ex officio taxation (No. 50349C on January 30 2025 and No. 51841C on April 1 2025).

According to Section 217 of the General Tax Law (Abgabenordnung), ex officio taxation is a procedure used by the Luxembourg tax authorities (LTA) to ensure the collection of taxes under certain circumstances. These situations include:

• Irregular accounts;

• Taxpayers failing to file their tax returns; or

• Taxpayers not responding to requests for clarification and justification regarding filed tax returns.

In such cases, the LTA may estimate a taxpayer’s income based on available information, such as data from previous years or other financial sources. This estimation results in an ex officio tax assessment, which is often unfavourable to the taxpayer, as the amounts are typically assessed conservatively. The taxpayer may then contest the assessment and provide the necessary documentation to revise the initial taxation.

The cases at hand are part of a broader series of cases where the LTA conducted tax audits in the pharmaceutical sector. In these cases, the LTA issued tax adjustments based on ex officio taxation, citing numerous accounting irregularities.

This article focuses only on the Administrative Court’s interpretation regarding how the LTA should apply ex officio taxation.

The ex officio taxation procedure is not a punitive measure against the taxpayer. Rather, it aims to determine the taxpayer’s tax bases by considering the information available to the tax office, striving to match the taxpayer’s actual tax bases as closely as possible.

The Administrative Court emphasised that ex officio taxation requires all efforts to approximate the taxpayer’s taxable bases as closely as possible, in accordance with the constitutional principles of proportionality and ability to pay (Luxembourg Constitutional Court, November 10 2023, No. 185). Therefore, it is essential that the LTA justify the methodology used when resorting to ex officio taxation and reconstructing the taxpayer’s accounting. This methodology must be precise and well supported.

The LTA may include a ‘safety margin’ (i.e., a buffer) when determining the taxpayer’s taxable bases ex officio, provided they do so with measure and moderation to account for uncertainties and inaccuracies related to the evaluation of the taxable base. If they fail to do so, the LTA would not comply with the constitutional principles mentioned above.

Conversely, the Administrative Court also highlighted the taxpayer’s right to have the tax assessment aligned as closely as possible to the actual taxable bases. In one of the above cases, it considered that the taxpayer did not need to demonstrate that the small discount granted to its clients had not been considered by the LTA in computing the tax adjustment. Indeed, such an unreasonable burden of proof would have deprived the taxpayer of any right to a substantive review of the contested adjustments as it would have necessitated detailing the methodology used by the LTA, to which the taxpayer did not have access.

These cases underscore the need for the LTA to justify the methodology used in resorting to ex officio taxation accurately and precisely. Taxpayers facing such situations should ensure they protect their rights effectively.