Luxembourg companies may enter into diverse commercial and financial transactions with associated companies (intra-group services, financing activities, transfer of tangible and intangible assets, etc.). For Luxembourg tax purposes, the terms and conditions agreed in intra-group transactions have to adhere to the arm’s length principle.
Under the arm’s length principle, transactions entered into between associated enterprises are compared to similar transactions between unrelated entities with a view to determine acceptable transfer prices. As a member of the OECD, Luxembourg adheres to the organisation’s Transfer Pricing Guidelines which reflect the consensus of OECD member countries towards the application of the arm’s length principle as provided in Article 9 (1) of the OECD Model Tax Convention.
Transfer pricing and related documentation requirements have become increasingly important since 2011 when the Luxembourg tax authorities released a first Circular on the tax treatment of entities carrying out financing activities (Circular L.I.R. No. 164/2 of 28 January 2011). On 27 December 2016, the Luxembourg tax authorities released a new Circular on the tax treatment of finance companies which applies as from 1 January 2017 (to existing and new financing transactions). Moreover, Article 56 LITL serves as a legal basis for upward and downward adjustments when Luxembourg companies do not comply with the arm`s length principle in their transactions with associated enterprises.
Transfer pricing inevitably exerts pressure on taxpayers to find a balance between a comfortable level of security and the costs for the preparation of sound transfer pricing documentation. In practice, Luxembourg companies should screen major intra-group transactions in order to identify issues that could raise suspicion on the part of the Luxembourg tax authorities and assess the magnitude of tax risks.
However, in a changing international tax environment, companies should integrate the documentation of transfer prices in their wider tax strategy and use it as a means to reflect the business rationale behind the corporate structure and intra-group transactions. In fact, sound transfer pricing documentation will make existing and new investments even more robust and immune to challenges by the Luxembourg and foreign tax authorities.
We assist our clients with the preparation of transfer pricing documentation to substantiate the arm`s length character of their intra-group transactions and to mitigate related tax risks.
Our transfer pricing services include, in particular, the determination of arm`s length prices/remuneration in regard to:
- Financing activities (i.e., determination of financing margins);
- Intermediaries (in financing transactions that merely on-lend funds);
- Interest rates on a wide range of debt instruments (e.g. shareholder loans, convertible bonds);
- Fund management services;
- Intra-group services;
- Debt/borrowing capacity;
- Valuation of tangible and intangible assets;
- Attribution of profits to a permanent establishment and its head office.
We further assist our clients with the preparation of Master Files in accordance with the new OECD guidance as required by several foreign jurisdictions.