The decision could strengthen the position of taxpayers in disputes with the Luxembourg tax authorities
For the first time, the Luxembourg Constitutional Court ruled on January 22, 2021 on the importance of the principle of legal certainty in tax law (decision No. 152).
Luxembourg tax law is based on the principle of legality as enshrined in the Constitution of the Grand Duchy. In a broader sense, only the Luxembourg legislature has the right to enact tax laws.
The principle of legal certainty requires that laws are published, are sufficiently clearly defined, have no retroactive effect and protect legitimate interests and expectations.
Although the principle of legal certainty has long been recognized by the Luxembourg administrative courts and at the supranational level by the European Court of Human Rights and the European Court of Justice (ECJ), it has not been codified in the constitution and the Constitutional Court had not previously ruled on its constitutional recognition or its value.
Decision of the Constitutional Court
The case concerned the law of July 23, 2016, which transposed EU Directive 2015/2060 repealing the EU Savings Directive into Luxembourg law. The law stipulates that interest payments from paying agents are no longer subject to the 10% withholding tax, but must be included in the taxpayer’s taxable income.
In this case, the Luxembourg tax authorities refused a withholding tax of 10% to a taxpayer who had received interest from a paying agent based in Switzerland in 2016 before the law came into force.
As a result, the tax office asserted that the interest should be included in the taxable income of the taxpayer and thus be subject to progressive uniform income tax rates.
The court ruled that there was no justification for applying the law retrospectively. It found that both the ECJ and the European Court of Human Rights recognize the principle of legal certainty as a general principle and the principles of the protection of legitimate expectations and the non-retroactivity of laws as the basic principles and expression of legal certainty.
The court therefore found that the principles of legal certainty, the protection of legitimate expectations and the non-retroactivity are to be regarded as fundamental principles of Luxembourg law. Since the rule of law must be sufficiently clear and accessible, but also predictable, the court considered these principles to be consistent with the basic principle of the rule of law.
The decision of the Constitutional Court is an important development, as the principles of legal certainty, the protection of legitimate expectations and freedom from retroactive effects (the latter two are extensions of the principle of legal certainty) have been officially recognized as constitutional.
While the concepts under the umbrella of legal certainty were a hotly controversial topic a few decades ago, they are in the headlines again, as the increasingly complex tax laws may still be enacted retrospectively.
This decision should be quite relevant for administrations and taxpayers as the legislature should refer to it when preparing, reviewing and voting on new tax laws.
With regard to existing tax laws that could have retroactive effects, the decision could strengthen the position of taxpayers in disputes with the Luxembourg tax authorities.
Partner, Deloitte Luxembourg
Deputy Managing Director, Deloitte Luxembourg
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