Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
When discussing communal finances, a distinction needs to be made between communes’ ordinary revenues which are designed to cover current expenditure and extraordinary revenues which are designed to cover capital expenditure.
Communes’ ordinary revenues are intended to cover their operating costs and may be subdivided as follows:
a. Local taxes:
- communal trade tax
- land tax
b. State grants:
- the Communal Financial Grant Fund
c. Local charges:
- for drinking water supplies
- for the removal and treatment of wastewater
- for waste disposal
- for the sale of various goods and services (electricity, gas, etc.)
d. State subsidies:
- state contributions towards the cost of operating childcare facilities (maisons relais)
- subsidies for public transport provided by the communes and groupings of communes
- subsidies for music teaching, etc.
Local taxes and state grants awarded through the Communal Financial Grant Fund constitute “non-earmarked” income for the communes, whereas local charges and state subsidies are “earmarked” income, to the extent that they are intended to pay for specific services provided by the communes and to finance clearly defined activities respectively.
Since the last monitoring exercise, local authorities in Luxembourg are still awaiting a communal finance reform promised by the national authorities. As a result, the mechanisms of local-government finance have remained almost unchanged, with the communes increasingly unhappy with a system of financing that takes no account of communes’ changing tasks or income inequality between communes. Indeed, for years now, the state’s ordinary revenues have been growing at a faster pace than those of the communes and the gap is becoming ever wider.
Some differences can nevertheless be observed in the way the various sources of non-earmarked communal revenue, i.e. the Communal Financial Grant Fund, the communal trade tax and the land tax, have evolved.
The Communal Financial Grant Fund was instituted under Article 38 of the Law of 22 December 1987 on the state budget for 1988. It is through this fund that non-earmarked grants are channelled from central to local government. The annual grant awarded via the fund is made up as follows:
- 18% of receipts derived from personal income tax determined on an assessment basis and from the withholding tax on wages and salaries
- 10% of VAT receipts, less any sums due to the European Communities by way of own resources derived from this tax
- 20% of motor vehicle tax receipts
- a flat-rate amount which is calculated schematically and the rules governing it which are, where necessary, adjusted annually to reflect changes in the legislation.
This tax has grown steadily in recent years. Two main factors account for this upward trend: an expanding job market in Luxembourg, which has helped boost personal income tax receipts, and substantial VAT receipts thanks to e-commerce. Under a European directive incorporated into Luxembourg law in 2014, however, as from 2015, VAT is to be applied in the consumer’s country, rather than the provider’s. The move to the new system of taxation will be spread over four years, which means that VAT receipts from e-commerce will have disappeared entirely by 2019. It is estimated that, as from 2015, the Luxembourg government stands to lose some EUR 800 million per year in VAT receipts, possibly more. Since the communes have traditionally received 10% of these receipts via the Communal Financial Grant Fund, the impact on local government finances will be considerable. During the consultation procedure, the Ministry of the Interior made it clear “that it is not the current government’s intention to alter the mechanisms of the Communal Financial Grant Fund to the detriment of communes’ interests.”
The communal trade tax was instituted by the Law of 1 December 1936, amended by the Law of 11 December 1967. Under this legislation, communes are entitled to levy a communal trade tax based on company profits. The communal trade tax is a means of involving communes in local business activities, by compensating them, as it were, for the costs and nuisance generated by these activities. Communal trade tax rates are determined annually by each commune. This tax is generally perceived as favouring communes where there are one or more companies making significant profits. The communal trade tax has been steadily losing ground to the Communal Financial Grant Fund. Under the state budget for 2015, communal trade tax receipts are projected to rise by a further 5.8% in relation to the amount budgeted for 2014. Compared to the actual amount for 2014, the forecasts are down slightly, by 0.6%. Given the “fiscal optimisation” efforts made by many companies, SYVICOL fears that communal trade tax receipts will continue to stagnate over the next few years.
It is important to note that receipts from the Communal Financial Grant Fund are the healthiest part of local government revenues, whereas communal trade tax is increasingly proving to be an unpredictable and unstable source of income for individual communes.
Lastly, under the amended law of 1 December 1936, communes are permitted to levy a local land tax. As with the communal trade tax, land tax rates are set annually by each commune. The local land tax would account for a significant share of communes’ overall revenues if the unit values used to calculate it were reviewed. However, the unit values have not been reviewed since 1941, resulting in persistent disparities in the value of some buildings because of their locations, which are now difficult to justify. SYVICOL has spoken out in favour of reforming the land tax to reflect actual property prices. An interministerial working group, which SYVICOL had been invited to join, had begun to discuss revising the land tax base under the previous government. This working group has not met, however, since the new government took office in December 2013, the latter having announced that it wished to deal with the matter as part of a wider fiscal reform.
Revising the unit values on which the land tax is based would help not only to reduce the disparities that currently exist in terms of the value of certain buildings but also to restore communes’ revenues, probably significantly.
Communes’ ordinary expenditure naturally depends on available revenue and the tasks they choose to undertake: a distinction needs to be made between mandatory tasks (original, constitutional and statutory) and optional tasks, i.e. ones that are freely chosen by the communes with or without financial help from the State.
Examples of tasks which communes are required to perform include:
- maintaining law and order within the commune;
- communal spatial planning;
- drinking water supplies;
- wastewater treatment;
- waste management;
- burials and upkeep of graveyards;
- road building and maintenance;
- social assistance;
- primary education – care;
- registering births, deaths and marriages.
Examples of tasks which communes can choose to perform include the setting-up and operation of sports, cultural and tourism infrastructure; youth facilities (care, day centres, etc.); facilities for the elderly (retirement homes, day centres, etc.), gas and electricity supplies (these tasks had tended to disappear from the local budget because of outsourcing to private entities).
As regards taxes, under Article 107 of the Constitution and Article 105 of the amended Communal Law of 13 December 1988, communal regulations introducing charges must be approved by the Grand Duke if the charges in question are in the nature of taxes proper designed to cover general expenditure from the communal budget, such as charges intended to contribute to the financing of collective facilities. During the consultation procedure, SYVICOL stressed that the fiscal autonomy of the communes provided for in Article 107, paragraph 3, is subject to the restriction that the taxes raised must cover a financial need. The association believes that it is hard for communal authorities to prove the relevant need, as demonstrated by the supervisory authorities’ refusal to approve numerous tax regulations. The Administrative Court has held the following: “While the communes are fiscally autonomous and can take the initiative of establishing levies and taxes and determining their base, their amount and the arrangements for application and exemption, such fiscal autonomy is not absolute, as the communes may exercise it solely under the supervision of the higher authority, which must ensure that the communes act in accordance with the restrictions provided for by law and demanded by the general interest, including the restriction that their power is exercised to the extent – and hence within the limit – of their needs.
This is not the case with communal regulations introducing charges designed to pay for a service provided by the communal authority, i.e. to cover the costs of that service, which is used specifically by the individuals who pay for it. These compensatory charges are subject to approval by the Ministry of the Interior under Article 106,7 of the amended Communal Law of 13 December 1988 and include notably charges for services such as water, gas and electricity supplies, waste disposal, parking and any other charges for services provided by the commune.
Such decisions must be approved by the Ministry of the Interior. Following approval, the decisions must be duly published in the commune by displaying them according to the procedure laid down in Article 82 of the Communal Law and then placing a notice in the official gazette.
Where the Ministry of the Interior finds that a tax regulation passed by a communal council is not in keeping with the law or is not in the general interest, it will return the decision to the relevant communal authorities, explaining the reasons why it cannot approve the proposed provisions and will invite the communal council to reconsider the regulation in the light of the comments made.
When drawing up the state budget for 2015, the government adopted several measures which SYVICOL believes will have an adverse impact on local finances and which it has condemned as detrimental to communes’ financial autonomy. These measures concern the following three points:
- the decision not to allow the communes to share in the extra income generated by the increase in VAT
- abolition of the state contribution towards financing the two-yearly salary increments
- the capping of communal trade tax receipts at three times the national average per capita revenue from Communal Trade Tax.
The Minister of the Interior has presented this package of measures as an initial step towards reforming local finances, to be followed by more extensive reform in the coming years. SYVICOL believes that, rather than carrying out genuine reform, the government is engaged in an exploratory process that is giving rise to an array of disparate measures aimed at reducing state financial transfers to the communes in order to shore up the state budget.
Given the current situation in the communes, which have long been calling for local finance reform, the rapporteurs feel that any such reform should seek to achieve the following goals:
- provide the communes with predictable and stable income;
- introduce a system to ensure that receipts are allocated between communes in a fair manner and are commensurate with their tasks.
The rapporteurs also feel that the mechanisms for financial equalisation could stand to be developed further. In this regard, representatives of SYVICOL have called for discussions on setting up an independent equalisation mechanism, including by dividing communes into categories (e.g. small, medium-sized and large).
As regards consulting local authorities according to the criteria laid down in Article 9, paragraph 6 of the Charter, the rapporteurs are of the opinion that genuine consultation does in fact occur in practice. The Ministry of the Interior sends draft legislation to SYVICOL and holds meetings with mayors. Local elected representatives, moreover, have confirmed the existence of such co-operation between central and local government, although they believe it is too ad hoc and wish it to be more regular. There is, however, no legal framework that would make it compulsory to consult the communes via SYVICOL, the main discussion partner representing local elected officials in Luxembourg, in all matters which concern them directly.
As regards borrowing, it is important to note that communes are permitted to take out loans only in order to fund extraordinary expenditure, if other methods of financing are neither feasible nor economical and if the commune is in a position to make regular repayments. Any loans in excess of EUR 50,000 must be approved by the Minister of the Interior.
Under the law of 23 February 2001 on groupings of communes, furthermore, certain groupings are entitled to borrow in order to pre-finance communes’ capital investments. Accordingly, local government groupings set up for the purpose of ensuring drinking water supplies, wastewater treatment, waste management or the construction and running of crematoria, may borrow in order to obtain the funds needed to finance capital expenditure connected with these tasks. At the request of the grouping, communes must make a contribution equal to at least 30% of the total capital required, meaning that the maximum loan that can be awarded by the grouping is 65% of the amount requested by the commune. As the contributions are gradually released, the grouping uses the funds to repay the loan. The debt interest is payable by the commune concerned.
Borrowing may be used only to obtain the funds needed to balance the extraordinary budget and only then if all the funds carried over from previous years have already been used up and provided the ordinary budget can support the capital and interest repayments.
With the increase in repayment capacity, local government debt had increased in 2009 and 2010, before levelling off at EUR 826.4 million at the end of 2013. At the same time, the total value of newly contracted loans declined sharply between 2010 and 2013, mainly because of the increase in revenues in recent years. For 2014, the available figures indicate a similar pattern to that observed in previous years.
As regards access to the national capital market, under Article 173ter of the amended Communal Law of 13 December 1988, communes and groupings of communes may, without prejudice to the legislation on public procurement, conclude among themselves and with public and private legal entities and individuals, agreements on matters of communal interest. These agreements must be approved by the Minister of the Interior if the amounts involved exceed EUR 100,000. In addition, the ministerial circular of 24 January 2014 has set new thresholds for public procurement contracts covered by European directives as from 1 January 2014. For example, for public works contracts concluded by local authorities, the threshold is EUR 5,186,000, whereas for supply and service contracts, it is EUR 207,000.
The rapporteurs conclude that Article 9 of the Charter is being partly complied with. The issue of free disposal of sufficient own resources seems to pose a problem. It is worth noting that Article 119, paragraph 3, of the draft revised Constitution currently being debated in Luxembourg provides that “The communes are entitled to the financial resources for performing the tasks assigned to them by law”. This provision is an innovation compared with the current text. If it were adopted, the rapporteurs believe that it would clearly be a very positive development, provided that it was implemented in practice. Local authorities are having to contend with the difficulties of introducing a system of financing which does not always take account of changes in their core tasks and income disparities between communes. The rapporteurs also feel that the equalisation formula and the criteria on which this formula is based could stand to be reviewed. Speaking to the delegation, the Minister of the Interior confirmed that he intended to revise the formula, just as, under the fiscal reform, he is planning to review the unit values for the land tax which have remained unchanged since 1941, resulting in lost earnings for local authorities. The rapporteurs therefore wish to underline that while paragraphs 1 to 5 of Article 9 are not being fully observed by Luxembourg, they received an assurance from the government that these provisions were currently receiving close attention from the authorities. The rapporteurs will follow any developments that occur in this area.
As regards conformity with paragraphs 6 to 8 of Article 9, the rapporteurs are of the opinion that these provisions are being observed. The government’s procedure for consulting local authorities is followed in practice. The rapporteurs’ view is that it would be a good idea to place this regular consultation on a more formal footing, with the government providing co-ordination, so as to ensure that this becomes a permanent practice in future.
Administrative Court Decision 6-12-07 (23020C to 23023C and 23040C).