Advance Tax Agreement

While most of the tax provisions of the law have limited importance for the Luxembourg financial centre, there is a specific provision on early tax treaties (formerly known as tax rulings) which can have a significant impact on the structures put in place before 2015. Tax treaties before 1 January 2015 are not limited in time from today and according to the previous practice of the Luxembourg tax administration. Article 5 of the Act provides for the automatic cancellation of these pre-tax tax treaties at the end of the 2019 fiscal year. This note focuses on the organization of a tax advance notice in the nature of private tax rulings. A private tax decision consists of advice that a taxpayer can obtain from the tax authorities regarding the application of tax legislation to his or her particular plan2. As such, the taxpayer is generally protected from additional taxes, penalties and interest when based on the judgment. As a general rule, the benefit of a private tax decision is not binding on other taxpayers on the taxpayer to whom the judgment was rendered, nor on the tax administration, even in identical or similar circumstances. An early decision-making system aims to promote clarity and consistency in the application of tax legislation, both for taxpayers and for the tax administration. However, there are also risks associated with the dissemination of confidential tax rulings that are not made public or notified by other means.

The Dutch tax authorities will assess the application and review all facts and circumstances regarding the turnover or activities for which the guarantee is required in advance. Upon receipt of the application, tax authorities may, if necessary, be in contact with all relevant knowledge groups and other technical specialists. This is essentially an internal procedure, although the taxpayer can communicate directly with these specialists during the decision-making process. The procedure for upstream agreements is also applied under the Patent Box regulation. The agreement signed by the subject and the tax administration remains in force for a period of five years from the year in which it is signed, provided that the circumstances – particularly the critical assumptions – under which the agreement was signed remain unchanged. In the case of the bi-multilateral APA, the validity period may begin from the date of notification, in accordance with the reciprocal agreement reached with the contracting parties in accordance with Article 25 of the model tax treaty. The commentary indicates that these tax treaties can still be applied for fiscal year 2019 before 2015, provided the agreement remains in line with current law. Significant risks may arise if confidential tax rulings are not published or notified by other means.

In the most extreme cases, the discretion granted by the tax authorities to private tax decisions may lead to an “organization of private law” outside the normal legislative procedure. In this regard, the issue of private tax rulings by the tax administration has the potential to create a parallel method of tax policy, which leads to a hidden source of tax law contrary to the normal functioning of the rule of law.

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