To be or not to be duly motivated: Act II

In 2020, the Luxembourg VAT authorities issued estimated VAT assessments to a Luxembourg company with respect to its annual VAT returns for the years 2017 and 2018. The VAT authorities challenged the company’s input VAT recovery position on the basis that it had not generated any turnover for those years, which, in their view, implied that the company did not carry out any economic activity. The company introduced an objection against those assessments.

The director of the VAT authorities rejected the objection as inadmissible on the grounds that it was not duly motivated as required by article 76 (3) of the amended law of 12 February 1979 on VAT (the VAT Law). According to the director, the objection did not provide sufficient explanations and evidence to justify the company’s position and to enable the VAT authorities to review its point of view.

The company brought an action before the first-tier court for annulment of the director’s decision and for recognition of the admissibility of the objection. The company argued that its objection was sufficiently motivated and supported by the documents attached to it. It also referred to a judgement of the same court from 1 February 2023 in which the court ruled that the requirement of a “duly motivated” objection per article 76 (3) of the VAT Law was contrary to the EU principles of equivalence and effectiveness.

The VAT authorities, on the other hand, maintained that the objection was inadmissible, as the company had not submitted a valid and duly motivated objection letter within the meaning of article 76 (3) of the VAT Law. According to the VAT authorities, they were entitled to require the company to prove the reality of its economic activity by means of objective, concrete and verifiable elements, which the company had failed to provide in their view, thus rendering the objection incomplete. The VAT authorities also disputed the relevance of the judgement of 1 February 2023 (see above), which they considered to be an isolated decision and even a “singular” case. They also pointed out that a draft law n°8186 has been introduced on 28 March 2023 to align the procedural rules for objections in direct and indirect taxation (i.e. requirement of a motivation and supporting documents for direct tax objections).

The court ruled in favour of the company and annulled the VAT authorities director decision. As the court found the objection to be admissible, the case was referred to the VAT authorities director for an assessment on the technical merits of the objection. The court further indicated that to make this assessment, the director will have to consider all the supporting documentation that the company submitted during the judicial proceedings, although all the documents and information were not provided together with the objection introduced by the company in 2020.

The court applied the reasoning that was developed in its judgement of 1 February 2023. It examined whether the “duly motivated” requirement for an objection was compliant with the EU principles of equivalence and effectiveness. As VAT is a tax derived from EU law, the  EU Member States national courts  must verify if the procedural rules intended to ensure that the rights derived from EU law are safeguarded under national law.

With respect to the principle of equivalence, the court examined whether the procedure for objections against VAT assessments can be seen as equivalent to the objection against a direct tax assessment. While the direct taxes (i.e. income, business and wealth tax) are not broadly harmonised at EU level, the procedures for objections against VAT and direct tax assessments are similar. Given that the direct tax procedure does not require a due motivation of an objection, the court found that the procedure to appeal against VAT assessments is clearly less favourable than for direct tax matters and therefore contrary to the principle of equivalence. With respect to the principle of effectiveness, the court examined whether the Luxembourg procedure for objections against VAT assessments was framed in such a way as to render it practically impossible or excessively difficult for a taxpayer to exercise the rights conferred by EU law. The judges ruled that the requirement of a “duly motivated” objection makes the procedure particularly difficult since an objection letter, even motivated, can be considered not “duly” motivated. This criterion makes the exercise of the right to appeal excessively difficult.

For more detail on the court’s reasoning in the judgement of 1 February 2023, please refer to our previous newsletter.

The court dismissed the argument raised by the VAT authorities which referred to the draft law n°8186. The court considered that this draft law was irrelevant because (i) it is still a pending draft and (ii) the new rules could not retroactively affect an objection that was introduced in 2020.

For further details on the content of the draft law n°8186, please refer to our previous newsletter.