In 2013, L SARL requested in writing an “advance tax agreement” regarding the tax treatment of Mandatory Redeemable Preference Shares (MRPS) which generated a preferred dividend for its sole shareholder.
L SARL wanted confirmation that the MRPS would be characterised as debt and that payments under the MRPS would therefore be tax deductible.
The tax administration issued an advance tax agreement confirming that the content of the request complied with the tax laws and administrative practices in force.
However, despite the agreement the tax authorities challenged the 2013 tax return and demanded proof that the return on the MRPS complied with the arm’s length principle.
L SARL found that such proof was not necessary since the MRPS’ tax treatment had already been agreed by the tax administration agreement.
The tax administration disagreed and issued an assessment.
The case was brought before the Administrative Tribunal.
The Administrative Tribunal held that an advance tax agreement is binding upon the tax administration where the following conditions are met:
- the taxpayer’s question must be in writing;
- the taxpayer’s request must be sufficiently clear and complete to allow the LTA to adequately analyse the taxpayer’s situation;
- the tax administration’s answer must come from a duly authorised tax official, or an official who the taxpayer could legitimately expect to be duly authorised;
- the tax administration must have had the intention of being bound by the information given to the taxpayer; and
- the tax administration’s answer must have had decisive influence on the taxpayer.
These conditions were met and the Tribunal concluded that the tax administration was bound to the advance tax agreement.
The Tribunal added that in the presence of an advance tax agreement, the tax authority cannot characterise the same structure and operations as an abuse of law, since the reality and legality of the taxpayer’s actions has already been acknowledged.
Lux 280220 Case No 41800