On 26 November 2019, the Luxembourg Higher Administrative Court (Cour administrative) referred a preliminary question to the Constitutional Court (Cour constitutionnelle) concerning the compatibility with the Constitution, and more specifically with the principle of the rule of law, of the change of a provision of the Luxembourg tax law which had a retroactive effect.
In the matter at hand, a Luxembourg resident taxpayer had received interest income from Belgium and Switzerland during the fiscal year 2016. Under the tax provision known as the "RELIBI" law, Luxembourg resident individuals that are the beneficial owners of interest payments derived from savings and paid by certain foreign paying agents have the possibility to opt for a final tax, which is currently set at a rate of 20% (but was 10% in 2016), in lieu of a taxation at the progressive tax rate.
On 23 July 2016, a law amended the "RELIBI" law by narrowing the list of countries which fall within its scope. Pursuant to this amendment, which was retro-actively applicable as of 1 January 2016, interest payments paid by paying agents located in Switzerland were excluded from the benefit of the "RELIBI" law. As the taxpayer had received interest payments from Switzerland in the course of the year 2016 and the amendment of the "RELIBI" law only occurred in the course of the year, he nonetheless requested to benefit from the final tax on said interest income. The tax authorities denied the application of the "RELIBI" law, which led to an unsuccessful complaint before the Director of the Luxembourg tax authorities as well as to an unsuccessful petition in first instance before the Lower Administrative Court (Tribunal administratif). The question brought before the Higher Administrative Court was thus whether a law having an economical retroactive effect could be enforceable on the taxpayer.
As a reminder, retroactivity, in the context of tax matters, can be split between two different sub-categories, the first one being the legal retroactivity and the second one being the economic retroactivity. Legal retroactivity occurs when laws are given a retroactive application date, which results in said laws covering situations which took place at a time where the parties involved could not know the application thereof. Economic retroactivity is deemed to occur when laws only start to apply from their publication date, but nonetheless cover situations that already occurred, because the point in time that is relevant for the tax treatment has not yet occurred (e.g. for periodic taxes such as income taxes, the date of 31 December of each year). As a result, since certain elements of the transaction, which are irreversible, predate the entry into force of the law, but the law nevertheless applies at the time at which the tax charge is determined, the taxpayer suffers from an increased tax charge due to the retroactive application of the law. The question of the compatibility of economic retroactivity of a law with the principles of legality (principe de légalité) and legal certainty (sécurité juridique), both sub-principles of the fundamental constitutional principle of the rule of law (état de droit, itself a principle which was only recently recognised by the Constitutional Court), has not yet been answered by the Constitutional Court. Therefore, the Higher Administrative Court referred a preliminary question to the Constitutional Court and decided to stay proceedings pending the response of the Constitutional Court.
Preliminary Question to Constitutional Court on Retroactivity of Tax Laws
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ARTICLE24 January 2020