With the introduction of a temporary tax amnesty regime in 2016, taxpayers have been given the possibility to file corrective tax returns by 31 December this year. Part of the Law of 23 December 2016's fight against tax fraud and money laundering, this regime represents an opportunity to report previously undeclared income without certain sanctions. The remaining three months are the last call for concerned taxpayers to report undeclared income (and related assets) that have not been previously disclosed to the Luxembourg tax authorities.
Why should I file?
As part of the tax reform 2017 package, the legislator has reinforced the fight against tax fraud and money laundering. Going forward, so-called "aggravated" and "serious" tax frauds will constitute predicate offenses of money laundering. Therefore, Luxembourg banks will be obliged to review their entire client population in light of fraud risk. Where banks have reasonable suspicion that failure to declare income is an [aggravated or serious] tax fraud, they will have to report those taxpayers to the State Prosecutor's Office. Therefore, concerned taxpayers that do not regularise their documentation will face an increased risk of being reported and may face criminal charges in court.
Conversely, the tax amnesty regime provides that "normal" sanctions, i.e. those sanctions which apply to tax fraud and non-intentional tax evasion, will not apply to taxpayers who duly regularise their situations.
Who is concerned?
Put simply, the tax amnesty regime targets all taxpayers that have failed to report taxable income or who have otherwise obtained undue tax advantages or reduced tax revenues within the past 10 years. It is irrelevant whether these taxpayers are individuals or companies, Luxembourg resident or non-resident.
What does it cost?
The tax amnesty provides protection against sanctions which would otherwise apply to the relevant tax offences. In the case of aggravated (serious) tax fraud, this can be imprisonment of up to 3-5 years and a fine of between €25,000 and 6-10 times the tax evaded or reimbursement unduly received.
The flip side is the §396 General Tax Law, which states that a surcharge penalty of 20% must be applied on top of the tax due further to the regularisation. Tax Authorities will assess the regularising return and notify the tax bill to the taxpayer – this is comparable to the ordinary tax assessment the taxpayer receives every year. Tax amnesty is then subject to the payment in full and within one month from receipt of the tax bill.
How to apply?
In order to benefit from this regime, concerned taxpayers have to file a single amended tax return. This regularising return is "unique", i.e. it must cover all the concerned years, all the concerned taxes (income tax, net wealth tax, VAT, inheritance tax, etc.), and all items of undeclared income (assets). It must be filed before 31 December 2017. Corrective filings after this deadline are likely to trigger the "normal" sanctions applicable.
Fail to prepare, prepare to fail
Dealing with tax disputes can mean uncertainty and complexity. For anyone considering filing a regularising return, it will be critical to employ an appropriate strategy for responding to the Tax Authorities and for remaining compliant. The return must also meet certain criteria to protect against the sanctions which otherwise apply.
Not setting up a plan for resolving potential disputes means that uncertainty, inefficiency, and lost opportunities could result. In other words, filing the regularising return requires adequate preparation time. In order to get results, despite the deadline being only 31 December this year, concerned persons are well advised to consider the final call as being now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
