Recent Luxembourg case law clarifies procedure of exchange of information in tax matters
Amongst various steps taken by the Luxembourg government in the recent months to implement its international tax policy, compliance of its DTTs with the OECD standards on exchange of information in tax matters has been subject to many updates. This policy implementation took the form of the recent amendment of a significant portion of the double tax treaties (“DTTs”) concluded by Luxembourg. As of today, 27 ratified DTTs/protocols, representing more than 50% of the Luxembourg DTT network, follow the OECD standards.
The OECD standards on exchange of information in tax matters provide for information exchange upon request, where the information is “foreseeably relevant” for the administration of the taxes of the requesting party, regardless of bank secrecy and a domestic tax interest.
An adaptation of Luxembourg legal framework was necessary to override banking secrecy rules, which would not be in compliance with the OECD standard, and to organize the procedure applicable to the exchange of information. This adaption has been achieved via the adoption of the law of the 31 March 2010, which ratifies the 27 DTTs/protocols and which defines, for these specific DTTs/protocols, the procedure applicable to exchange of information (for previous coverage on the Law, please read our ATOZ Newsletter of March 2010.
DTTs that do not fall within the scope of the Law, i.e. DTTs non compliant with OECD standards on exchange information, remain governed by the general provisions of Luxembourg law, implying that information can only be exchanged when it does not contervene the Luxembourg banking secrecy rules.
Such significant amendment of the Luxembourg legal framework gave rise to numerous disputes in front of the Luxembourg Courts over the past months and weeks, as many information holders challenged the legality/validity of the information requests.
When are the new provisions applicable?
The disputes brought before the judges were mainly debating on the application ratione temporis of the law. The issue is of critical nature to the extent it determines which legal regime applies to the exchange of information request.
The Law remains silent on the date it enters into force. The principle is that, in the absence of any other provision, a law enters into force 3 days after its publication in the official gazette. The Law would then apply as from its entry into force to any request for exchange of information. The Administrative Court (Cour Administrative, CA, February 9, 2012, n° 29655C) ruled however otherwise. It decided that, to the extent the purpose of the legislator was to ensure the efficiency of the exchange of information, it intended necessarily (although implicitly) to link the application ratione temporis of the Law to the application ratione temporis of the treaties/protocols ratified. The CA therefore ruled that a case has to be governed by the Law only in the following circumstances:
- the relevant DTT/protocol is already into force at the time the foreign tax authorities issue the request for exchange of information and,
- the relevant DTT/protocol is already applicable to the tax period covered by the request.
The CA further stated that the above analysis has to be performed separately in case of a single request covering several tax periods:
Example: Exchange of information requests from France, based on the Protocol which applies since October 29, 2010 to tax periods starting on or after January 1, 2010.
• On 13 May 2011, the French tax authorities request information in relation to tax years 2009, 2010 and 2011.
Application of the Law to tax years 2010 and 2011;
Application of the standard regime to tax year 2009 (whereby exchange of information is only possible to the extent in line with banking secrecy rules, exceptions being provided only in very limited situations).
The CA confirmed its position in a subsequent decision (May 10, 2012, 29943C) and the lower administrative court (Tribunal Administratif, TA) followed the principles set by the CA more recently (TA, May 24, 2012, n° 30017).
Competent authority for notifying the information injunctions
The Law defines the administration which is competent for notifying an information injunction but does not define the competent person within the relevant administration.
Notified holders of information claimed before courts that exchange of information injunctions issued by the administration in the person of public servants (so called préposés) instead of the head of the Direct Tax Authorities (Administration des Contributions Directes, ACD) had to be declared null.
The CA proved them right (CA, February 9, 2012, n° 29655C). According to the CA, considering that the Law requires that the fine for a violation of the information injunction has to be issued by the head of ACD or its representative, the same requirement applies to the information injunction itself. Thus, the information injunction is only valid when issued by the head of ACD or its representative.
According to the CA, the term ” representative” can only refer to the head of the division “Exchange of information” of the ACD or to any member of the head department of the ACD. Any other public servant (préposé) will not be recognized as an “authorized representative” within the meaning of the exchange of information procedure.
This position was the followed by the TA in a subsequent case (TA, June 11, 2012, n°30017a).
New requirement to state the reasons justifying the information injunction
The issuance of an information injunction is not subject to any specific content conditions, aside from an obligation of notification to the information holder. During the drafting process of the Law, the CA commented on the Law in an opinion dated October 29, 2009 and recommended that an obligation to state the reasons of the injunction should be added in the Law in order to avoid any breach in the rights of defense. Neglecting the CA’s recommendation, the Law did not provide for such an obligation.
The TA applied the comments issued by the CA during the drafting process in a case involving the Sweden-Luxembourg DTT (TA May 23, 2012, n°30177). It ruled that the injunction must enable its addressees to verify if the conditions of the information request are complied with. As a consequence, an information injunction merely stating that the underlying request complies with the legal conditions would fail to state its grounds in a satisfactory manner and should be considered as null.
What is a foreseeably relevant information?
An additional important piece of the Luxembourg exchange of information request procedure consists in the definition of the information that can be requested. In this context, a recent case brought in front og the CA (CA, May 24, 2012, n°30251C) brought the latter to explain the condition of foreseeably relevance. It did so by overruling a decision of the lower court (TA, March 20, 2012, n° 29592a).
On the basis of the OECD commentaries and on the OECD manual on exchange of information, the CA ruled that an information request is foreseeably relevant if (i) it relates to one or several specific taxation cases or to given taxpayers and (ii) it states the identity of the person under tax investigation. Exchange of information can validly relate to a third party, but only to the extent that the information is relevant to the taxation of one given taxpayer and such taxpayer is identified in the request. Any request failing to satisfy these conditions is null.
In the case at hand, a notification was addressed to a Luxembourg bank to request an information on a Malaysian company. The request designated the Malaysian company as foreign taxpayer under investigation for taxation purposes in Sweden. The request also detailed that it was aimed at identifying the financial flows between the Malaysian company and Swedish tax residents, who were not identified in the request. The information holder argued about the incoherence in order to claim that the information requested was irrelevant.
The CA proved the information holder to be right and declared the injunction null. In the light of the above mentioned principles, the CA reasoned as follows:
- If the request designates the Malaysian company as a foreign taxpayer subject to taxation in Sweden, then the request has to detail the grounds of such Swedish taxation.
- If the actual purpose of the request is the taxation of Swedish taxpayers, then the request has to identify such taxpayers and clearly state that the Malaysian company is involved as a third party holding relevant information for Swedish taxation purposes.
The case is also interesting to the extent it makes clear that exchange of information is not limited to residents of both contracting states.
Fair trial vs. confidentiality of the request for exchange of information
In the above quoted case (TA, February 6, 2012, n°29592), the holder of information argued that he was unable to verify the relevance of the requested information to the extent (i) the injunction did not state its grounds and (ii) he has not been provided with the underlying request.
The TA acknowledged that the information provided in a request is generally understood as being covered by confidentiality rules. An administrative authority can validly refuse to provide the taxpayer or the holder information with the request for exchange for information itself, based on its confidential nature.
The treaty however authorizes the disclosure of information to persons being involved in the assessment, collection, enforcement, proceedings of taxes covered by the request. This means that information may be disclosed to (i) the taxpayer and (ii) to judicial authorities charged with deciding whether the information should be released to the taxpayer or his proxy.
On the basis of the above, the TA ruled that:
- an authority allowed to disclose information in public proceedings is not entitled anymore to argue non-disclosure based on confidentiality rules;
- refusing the taxpayer/his proxy access to the information in the course of judicial proceedings would contravene the principle of fair trial.
The TA instructed the Luxembourg authorities to deposit the request for exchange of information to the court to enable the holder of information to be informed of its contents.
The Luxembourg judges play and will most probably keep on playing a key role in exchange of information matters. They bridge the gaps of the Law, clarifying and complementing it on aspects as essential as the period for which request are valid under the Law. The case law clarified the procedure of issuance of an information injunction. It clearly defined the authority competent for issuing the injunction and added a requirement for the issuing authority to state its reasons. Furthermore, when being seized of an information injunction, the judge is indirectly called to verify the legality of the underlying request. As such, the Luxembourg judge is called to define and appreciate the conditions of foreseeably relevance of the information requested, as set out by international standards. The foreseeably relevant nature of an information request is probably one of the issues of the procedure of information exchange which will give raise to the most numerous disputes in the coming months, before a clear and accepted standard is defined.
In the meantime, the OECD has again amended its exchange of information standards: an update of the OECD Model Tax Convention was released on 18 July 2012, which amends article 26 (exchange of information) in such a way that it now explicitly allows for group requests. This means that based on the new Model, the tax authorities will be able to request information from a group of taxpayers, without naming them individually, to the extent the request is not a ’fishing expedition’. Should this change be adopted by Luxembourg and its treaty partners in future, the procedure of exchange of information will be subject to some amendments.