Tax Administration’s guidance of 28 July 2021 on setting tax fines: No more mercy for ignorance!

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The 2016 Law outlines the difference between two types of tax penalties: administrative tax penalties and criminal tax penalties.

1. Administrative tax penalties

With respect to administrative penalties, the Circular highlights the distinction between unintentional and intentional administrative penalties.

  • Unintentional administrative penalties

Perpetrators of an unintentional tax fraud (§ 402 (1) Abgabenordnung “AO”) refer to those who, in their capacity as taxpayers, agents or business managers of a taxpayer (such as accountants or domiciliation companies), negligently cause the reduction of tax revenues or the granting or maintenance of unjustified tax benefits.

Unintentional tax fraud differs from intentional tax fraud due to the behaviour of the taxpayer and/or of the intermediary. To be liable for unintentional tax fraud, the taxpayer/intermediary does not need to have an active role and the fraud itself needs not be intentional. As such, the mistake or oversight occasioning the fraud is itself sufficient. In addition to criminal liability for intermediaries as provided for by Luxembourg penal law, the Circular opens up an avenue for the levying of administrative penalties to representatives who act as intermediaries on behalf of taxpayers. Representatives should not neglect this tax liability, which can be financially burdensome and should seek qualified tax advice.

Unintentional tax fraud is punishable with a fine of €125,000. However, the administrative fine must not exceed one quarter of the amount of the taxes evaded or the refund unduly obtained and may not be less than 5% of the taxes evaded or the refund unduly obtained.

  • Intentional administrative penalties

The 2016 Law provides for two types of intentional administrative penalties: on the one hand, administrative penalties for simple tax fraud (§ 396 (1) AO) and, on the other hand, penalties for incomplete, inaccurate or non-declarations (§166 (3) AO).

It should be noted that liability for both would require evidence of the intention to evade tax(es). With that said, taxpayers should keep in mind that simple tax fraud has been legislated to include a broad scope and is not limited to just tax reports and documentation. Instead, § 396 (1) AO intends to penalise, via administrative fine, the act of obtaining undue tax advantages (tax evasion or undue refunds of taxes paid), by a person, for himself or for the benefit of another person.

Simple tax fraud is punishable by a fine of between 10% to 50% of the taxes evaded (or refunds unduly obtained). Whilst incomplete, inaccurate or non-declarations may be punishable by a fine of 5% to 25% of the taxes evaded or refunds unduly obtained.

  • Common provisions for unintentional and intentional administrative tax penalties

The 2016 Law specifies the tax office as the competent authority setting the quantum of fines. It also highlights the possible remedies and administrative appeals: wherein a tax claim may be filed within three months by lodging a complaint with the Director of the Direct Tax Administration or his delegate (not a hierarchical appeal).

The 2016 Law has thus put an end to prior practice, as decided by case law, that considered simple tax fraud to be within the scope of the judicial courts. As these are purely administrative sanctions, the 2016 Law will allow for faster procedures and avoids recourse to the courts.

The Circular also contains a paragraph dedicated to the administrative fine setting process for the purposes of promoting a sense of uniformity with regards to tax office decisions. As such, whilst the determination of the amount of administrative fines remains a discretionary decision, the Circular provides guidelines for the tax offices to be followed: wherein the fine must be justified by the factual circumstances and proportionate to the errors found and the taxpayer's capacity to pay.

Thus, subject to compliance with the thresholds set by the law, the tax offices have considerable flexibility to determine the amount of the fine.

2. Criminal tax penalties

The 2016 Law deals with two criminal offences, aggravated tax fraud and tax swindling.

  • Aggravated tax fraud 

Aggravated tax fraud (§396 (5) AO) was a criminal offence created by the 2016 Law. Whilst it has the same required elements as simple fraud, the determining factor that distinguishes aggravated tax fraud from simple fraud lies in the seriousness and scale of the offence, which may be determined by two alternative thresholds:

  1. fraud involving an amount of tax or an un undue refund greater than a quarter of the annual tax or the annual refund actually due (but not less than €10,000) or ;
  2. fraud involving an amount of annual tax evaded or the annual refund to be made exceeds the sum of €200,000.

Aggravated tax fraud is punishable by imprisonment for a period between one month to three years and a fine between €25,000 and six times the amount of tax evaded or the undue refund.

  • Tax swindling

The offence of tax swindling (§396 (6) AO) was originally introduced by the law of 22 December 1993. In its prior form, it was criticised for being too imprecise and was derided as a source of legal uncertainty. To correct this, the 2016 Law introduced certain thresholds to distinguish tax swindling from other forms of tax fraud.

The four elements of tax swindling are: (i) tax fraud (ii) involving a significant amount of tax (iii) carried out by fraudulent means intended to deceive the tax administration and (iv) that are employed in a systematic manner.

Tax swindling is punishable by imprisonment for a period of not less than one month and not exceeding five years as well as a fine between €25,000 and ten times the amount of tax evaded or the undue refund.

Attempted aggravated tax fraud and tax swindling are also punishable. Moreover, it should be noted that tax fraud and tax swindling are criminal offences and can only be dealt with by judicial authorities (i.e. not tax offices). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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