Since 1st January 2017, the General Tax Code (Article 396 AO) covers three types of tax fraud :
- Simple tax fraud (article 396 (1) AO);
- Aggravated tax fraud (article 396 (5) AO);
- Tax swindling (article 396 (6) AO).
Both aggravated tax fraud and tax swindling are criminal offenses whereas simple tax fraud remains a non-criminal (administrative) offense.
The Circular issued by the Direct Tax Authorities (Circulaire du directeur des contributions L.G.-A n° 67) clarifies thresholds to quantify objectively when the scale of the fraud is sufficiently material for the sanction to become criminal in nature:
- If the fraud relates to an amount below EUR 10,000, there is no aggravated tax fraud. This first level eliminates smaller cases that are always considered an administrative offense.
- Fraud involving amounts of more than a quarter of the annual tax due/refund actually due but not less than EUR 10,000 constitutes aggravated fraud. This second level is designed to punish fraud that, in absolute terms, may be considered small, but is material in relation to the amount of the tax due.
- Fraud involving an amount of annual tax avoided or unduly reimbursed exceeding EUR 200,000 always constitutes aggravated tax fraud, except in the presence of fraudulent actions, in which case the offense is to be qualified as tax swindling.
With respect to VAT, aggravated tax fraud is foreseen by the Luxembourg VAT law when the amount of the offense exceeds a quarter of the VAT avoided or unduly reimbursed that is not lower than EUR 10,000, or when the VAT avoided or unduly reimbursed exceeds EUR 200,000 per reporting period. In that case, a prison sentence between one and three months and a fine between EUR 25,000 and six times the amount of the VAT avoided or unduly reimbursed can be imposed.
Yes. In the context of a tax assessment (reassessment) or tax audit, to the extent that the tax adjustment reaches certain thresholds (please refer below) and the constitutive elements of the tax fraud are met, criminal proceedings may be initiated.
No. Tax penalties do not trigger criminal proceedings.
Yes. Criminal intention must be characterized.
Aggravated tax fraud is characterized by three elements:
- Obtain undue tax advantage or cause reduction of tax revenues;
- Intention by fraud through intentional act or omission;
- Volume (more than 25% of annual tax or reimbursement (both effectively due) and not
less than EUR 10,000 or more than EUR 200,000 of annual tax effectively due or of
annual reimbursement to be provided).
Tax swindling is characterized by the following elements (i) an active or passive breach of the tax law, resulting in a decrease of the tax charge or the granting of a tax benefit not provided by the tax law; and (ii) a guilty mind.
Tax swindle attempts will be subject to the same sanctions as actual tax swindles.
No. The spontaneous filing of amended tax returns and full payment of related taxes have no impact on the initiation of criminal proceedings.
Yes. Criminal tax proceedings can start either on the initiative of the Public Prosecutor or through the Direct Tax Authorities that can seize the Public Prosecutor.
For simple tax fraud, the Direct Tax Authorities and its investigation department are in charge of the investigation.
In the case of aggravated tax fraud and tax swindling, the Public Prosecutor oversees the investigation.
According to Luxembourg law, the statute of limitations with respect to corporate income tax (CIT), municipal business tax (MBT) and net wealth tax (NWT) is five years from the year following that when the tax debt was incurred. In other words, with respect to CIT, MBT and NWT, the statute of limitations starts with the taxable event (i.e., the event or action that renders the tax assessable) irrespective of whether or not a tax assessment has been issued by the Direct Tax Authorities (DTA). The statute of limitations can be extended by five additional years (i.e., 10 years in total) in case: (i) incomplete tax returns are filed; (ii) inaccurate tax returns are filed; or (iii) no tax returns are filed.
The 10-year limitation period applies when tax returns are not filed or in the case tax charges are increased due to the filing of an inaccurate or incomplete tax return (it is irrelevant whether it was intentional or not). For instance, regarding the tax charge for 2023, the (ordinary) five-year limitation period will start on 1 January 2024 and will expire on 31 December 2028.
However, a reassessment of the 2023 tax assessment is still possible for a 10-year period starting on the following year succeeding that during which the tax debt is due. In other words, the statute of limitations will start on 1 January 2024 and will expire on 31 December 2033.
From a VAT standpoint, the statute of limitations is five years from December of the year during which the VAT becomes due.
With respect to municipal taxes, the statute of limitations is five years following the year when the first reminder occurs; while for customs duties, the statute of limitations is three years from the year following that during which the tax debt is incurred.
Finally, for registration duties, the statute of limitations is generally 30 years. In practice it can be two years from the date of registration.
The statute of limitations applies not only to the principal amount of debt but also to ancillary income (e.g., interest for late payment, penalties).
In certain circumstances, the extinctive prescription can be interrupted or suspended. Under Section 222 of the Luxembourg General Tax Law (Abgabenordnung), the DTA has the possibility to amend the tax assessment issued on previous years to the extent the statute of limitations has not yet expired. This is only possible if the DTA becomes aware of a new fact or other new means of proof (neue Tatsachen oder Beweismittel) justifying the increase of the tax previously assessed. The facts must be proven, ignored initially by the DTA, established with certainty and relevant from a tax perspective.
According to Luxembourg law, the statute of limitations with respect to corporate income tax (CIT), municipal business tax (MBT) and net wealth tax (NWT) is five years from the year following that when the tax debt was incurred. It is therefore on the basis of the event giving rise to the tax debt that is computed the status of limitation period, regardless of whether or not a tax assessment has been issued.
The punishment of aggravated tax fraud is one month to three years of imprisonment.
The punishment of tax swindling is one month to five years of imprisonment.
In addition, for tax fraud in relation to VAT or registration duties, partial or full forfeitures of certain civil rights during a period of five to 10 years.
Yes, a compliance or risk mitigation program put in place within the Company would strongly mitigate criminal liability in Luxembourg, in particular, if certain steps for assessing compliance are laid down in a specific policy.
No. A temporary tax amnesty regime was introduced by the Law of 23 December 2016 requiring the relevant taxpayers to file corrective tax returns by 31 December 2017. It was intended to encourage taxpayers to regularize their tax affairs. The tax amnesty regime provided protection against sanctions which would have otherwise been applied to the related tax offenses.
From this date, the spontaneous filing of a corrective tax return does not prevent the application of sanctions.
No. There is no exemption from criminal liability in case of full payment of a tax assessment.
Yes. The statute of limitation period of criminal proceedings (i.e., five years) is interrupted by the opening of an investigation.
Yes. As clarified by the Circular L.G. - A n° 67 of 28 July 2021, the amended law of 19 December 2008 on inter-administration and judicial cooperation provides that the prosecutor and the Financial Intelligence Unit (FIU) must share with the Luxembourg Direct Tax Authorities information, which may be useful for the correct assessment and collection of taxes. If, after analysis, the information shared gives rise to a finding of tax fraud, the Direct Tax Authorities must impose a fine or, if the information reveals possible offenses of aggravated or intentional tax fraud, return the case to the judicial authorities or the FIU for further investigation and eventual prosecution.
No. Luxembourg tax law does not provide the possibility for the defendant to enter into a plea bargain as such, that is, an agreement with the Public Prosecutor whereby the defendant accepts to plead guilty in exchange for a reduced sentence without going to trial.
Both individuals and legal entities can be prosecuted for tax offenses.
Yes. If either the company or the individuals are foreigners or not resident in Luxembourg, this does not exclude the possibility of prosecution.
Yes. The representative of a legal entity must fulfil all the tax obligations undertaken by the entity, in particular submitting tax returns within the legal deadlines and paying the taxes due. Thus, the Direct Tax Authorities could use the possibility offered by the law to “call in warranty” directors and managers to settle the company’s outstanding tax debts.
Directors’ liability is invoked when the company fails to meet its tax obligations and the directors have failed in their duty of supervision. The directors shall be liable for the amount claimed to the company if the tax authorities characterize a fault, a damage and a causal link. Directors are liable for the debts existing at the start of their mandate until their termination.
Nevertheless, the corporation's tax liability is not transferred to the guarantor, the Company remains liable for the unpaid tax.
Yes. Over the last five years, a constant increase in the number of tax cases brought before the Luxembourg tribunals has been observed especially with respect to managers tax liability (appel en garantie).
One of the other reasons justifying the increase in the number of tax challenges may be found in the introduction of the new classification of tax offenses with explicit and relatively low thresholds to reach out a criminal qualification.