To be or not to be...duly motivated. That is the question for claims against VAT assessments

On 7 May 2020, the Luxembourg VAT Authorities (AEDT) issued arbitrary tax assessments to a limited liability company established in Luxembourg (hereafter "the Company") with respect to its annual VAT returns for the years 2017 and 2018.

On 16 July 2020, the Company filed an administrative claim against these assessments.

On 23 November 2020, the director of the AEDT notified the Company of his decision to reject the claim on the grounds that it was not "duly motivated".

The Company's subpoena sought the review of the director's decision, i.e. for the tribunal to rule that the Luxembourg VAT law does not allow the director of the AEDT to declare an administrative claim inadmissible on the procedural grounds that it is not "duly motivated".

The AEDT asked the tribunal to consider all the Company's claims as inadmissible and to make the content of the arbitrary assessments definitive.

The tribunal examined whether the "duly motivated" nature of a claim could influence its admissibility and whether such a requirement is compliant with the principles of equivalence and effectiveness as construed by European case law.

The national jurisdictions must verify if the judicial procedures which aim at guaranteeing, in the domestic law, the safeguard of the rights that persons derive from EU law (in this case, VAT as a tax derived from EU law) are compliant with the principles of effectiveness and equivalence.

The principle of equivalence is based on the requirement that, in the absence of EU legislation, it is for the domestic legal system of each Member State to designate the competent courts and tribunals and set up the procedures intended to safeguard the rights which individuals derive from EU law. These rules must not be less favourable than those existing for the safeguard of similar domestic rights.

The principle of equivalence is assessed looking at the object, the cause and the essential elements. The tribunal compared the procedure to claim against a VAT assessment with the equivalent procedure for direct taxes, and noted that the two procedures are similar. Indeed, (i) the essential element of each procedure is to claim against a tax assessment, (ii) the cause is the disagreement with the position taken by the concerned authority, and (iii) the object is the request for a review of the taxation by the director of the relevant authority.

Once the similarities between the two procedures acknowledged, the tribunal compared the modalities thereof and noted that the requirement for a claim to be “duly motivated” only exists for the VAT procedure, while the direct tax procedure merely states that the claim must be timely/appropriate (“réclamation opportune”). The tribunal noted that the procedure for VAT claims was less favourable, on the ground that the claim was rejected because it was not “duly motivated”, without any review or analysis on the merits.

The principle of effectiveness is based on the requirement that the exercise of the rights conferred by EU law should not be rendered practically impossible or excessively difficult. Even if the VAT law provides for a remedy to the taxable person within a time limit which does not make it impossible or excessively difficult to exercise its right, it is the requirement that the claim must be “duly motivated” that makes the filing of a claim particularly difficult because, depending on the case, a claim may be “motivated” but deemed not “duly motivated” by the VAT Authorities and be rejected on that sole basis, without analysis on the merits.

Therefore, the tribunal considered that the requirement that a claim must be “duly motivated” is not compliant with the principle of equivalence, nor with the principle of effectiveness.

Therefore, the tribunal ruled that the decision of the director of the AEDT of 23 November 2020 is void as to the refusal to review and assess the content of the Company’s claim of 16 July 2020 against the arbitrary tax assessments for the years 2017 and 2018.

The tribunal sends back the case to the AEDT in order for the director to analyse the Company’s claim on its merits.

Finally, the tribunal ruled that the requirement that a claim against a tax assessment issued by the AEDT should be "duly motivated" as per article 76, §3, first paragraph of the Luxembourg VAT law is not compliant with the principle of equivalence, nor with the principle of effectiveness resulting from case law of the Court of Justice of the European Union.

It is anticipated that the VAT authorities will appeal against this decision.

It is worth pointing out that this judgement may have a significant impact if it is confirmed by a court of appeal or at a higher level. Indeed, it is settled case law in Luxembourg that claims against VAT assessments must be “duly motivated”, and claims are often dismissed with no review on the merits on this sole procedural basis. Moreover, this is the first time, to our best knowledge, that the requirement for a claim to be “duly motivated” is successfully challenged at the judicial level by a taxable person, which may, in the future, overturn the current jurisprudence.

As it happens, the recent bill 8186 may modify the procedures applicable in the field of direct taxes to claim against tax assessments. The ongoing judicial procedure on the claims in the field of VAT and this bill will have to be closely monitored, as the latter may influence discussions in courts and tribunals of the former.