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Global transfer pricing guide

Transfer pricing - Luxembourg

30 Aug 2023

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Introduction to transfer pricing in Luxembourg
Transfer pricing rules
  • The internationally accepted arm’s length principle, per Article 9 of the OECD Model Tax Convention on Income and Capital, is incorporated under Article 56 and Article 56bis of the Luxembourg Income Tax Law (“LITL”). 
  • Article 56 LITL is the core transfer pricing provision in Luxembourg that requires the arm’s length principle to be applied to intra-group transactions concerning goods, services, intellectual property or financing activities. It serves as a legal basis for the upward and downward adjustments when Luxembourg group entities do not comply with the arm’s length principle. 
  • Article 56bis further provides detailed guidance to Luxembourg taxpayers and Luxembourg tax authorities (“LTA”) on how to apply the arm’s length principle. 
  • On 27th December 2016, the LTA issued new guidelines reshaping the transfer pricing framework for entities carrying out intra-group financing activities in Luxembourg. The new Circular L.I.R. n°56/1-56bis/1 (“Circular”) is applicable to any entity carrying out intra-group financing transactions.
  • Following the recent submission of a draft law by the Luxembourg Minister of Finance to the Parliament, a draft Grand-Ducal Regulation (“GDR”) was published in the first quarter of 2023 by the Luxembourg Government. This GDR details the obligation to be introduced for taxpayers with related-party transactions to provide, upon request, specific documentation on their transfer pricing policy.
  • According to the GDR, Luxembourg tax resident entities of Multinational Enterprise (MNE) groups meeting certain thresholds will be required to provide information regarding their global business operations and TP policies in a “Master File”, and detailed transfer pricing documentation in a “Local File” as of the fiscal year 2024.
OECD guidance
  • As an OECD member country, Luxembourg bases its domestic transfer pricing framework in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, released in July 2022 (“OECD Guidelines”).
Transfer pricing methods
  • Luxembourg’s transfer pricing framework does not prescribe any preference or hierarchy for specific method(s) and supports the application of the most appropriate method – in accordance with the OECD Guidelines.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Following section 3 of Paragraph 171 (§171 of the General Law), the Luxembourg tax legislation clarifies that taxpayers that have intercompany arrangements should be able to provide evidentiary support and justification for the pricing applied to their intercompany transactions and provide it to the Luxembourg tax administration (LTA) upon request. In absence of further guidance, reference is made to the OECD guidelines and action 13 of the base erosion profit shifting (BEPS) action plan.
  • The new GDR provides that, in accordance with the international standards resulting from the OECD BEPS Action 13 Report, this documentation may extend to the preparation of a Master File and a Local File. The general thresholds to determine the applicability of the Local File and Master File documentation requirements are summarized later.
  • Such documentation needs to be provided to the LTA during tax assessment to evidence facts and provide information with respect to statements made in the tax returns. Additionally, such a documentation can also be filed together with the corporate income tax returns.
  • An Advance Pricing Agreement (“APA”) for intra-group financing intermediation activities, per the Circular, cannot be requested for without a transfer pricing documentation.
  • LTA accept transfer pricing documentation prepared in: Luxembourgish, French, German, and English.
Master and local file
  • Consistent with the OECD Guidelines and BEPS Action 13, Luxembourg adopts the Master and Local file documentation approach.
  • The new GDR provides for requirements on when to prepare a Master and/or Local file documentation. The thresholds proposed in the new GDR refers to the country-by-country requirements (EU Directive 2016/88). On this basis, a Master file and Local file would only be required to be prepared if the consolidated revenues of the MNEs group would exceed 750 million € and the consolidated group has entities in at least two jurisdictions or more. In addition, a second threshold has been proposed to prepare a master file. A master file would be required for entities and permanent establishments that have a net turnover of at least 100 million € or assets of at least 400 million €.
  • Typically, the Master file should provide information on the global business operations and transfer pricing policy of the multinational enterprise (“MNE”) group, organizational structure of the MNE group, significant value drivers, main geographical locations, MNE group intangibles, financing activities within the MNE group and financial and tax positions of the MNE group.
  • A Local file would supplement the information provided in the Master file and should include detailed information on: management structure of the Luxembourg group entity, intra-group transactions concerning goods, services, intellectual property or financing activities, an analysis of the functions performed, assets utilized and risks assumed, an industry analysis and an economic analysis sufficiently documenting the arm’s length range of remuneration.
Some risk factors for challenge
  • Luxembourg group entities that receive and further grant loans to other group entities.
  • Interest rates on intra-group loans.
  • Licensing payments.
  • Business restructurings, or changes in TP model, can also trigger a challenge but needless to say, businesses can evolve, and if the previous TP method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
CbC legislation in Luxembourg
  • Effective as from 1 January 2016, Luxembourg implemented the Country by Country (“CbC”) legislation applicable to the MNE groups with revenues exceeding EUR 750 million during the fiscal year immediately preceding the reporting fiscal year.
  • The Luxembourg tax resident ultimate parent entity of an MNE group must, on an annual basis, file a CbC report with the LTA with respect to its reporting fiscal year. 
  • Additionally, a notification must be made by each Luxembourg entity to the LTA on their status. The notification essentially indicates whether the entity submitting the notification is the reporting entity or not, and, if not, which entity within the MNE group is the reporting entity.
  • The filing of the CbC report must be done within 12 months of the last day of the reporting fiscal year by the relevant reporting entity. 
  • The filing of the CbC notification must be done by the last day of the reporting fiscal year by the Luxembourg entity.
  • On 24 February 2023, the Luxembourg Government submitted a draft law (Draft Law) to Parliament aimed at transposing the public CbCR Directive (Directive (EU) 2021/2101 of the European Parliament and of the Council of 24 November 2021 amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches).
  • On 19 July 2023, the draft law implementing the public CbCR Directive was adopted in first reading.
  • The rules set forth in the Directive require both multinational enterprises (MNEs) based in the EU and non-EU based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue exceeding €750 million in each of the last two financial years to disclose publicly the income taxes paid and certain other information, such as a breakdown of profits, revenues, and employees per country.
  • The new obligations introduced will apply to accounting periods starting on or after 22 June 2024. Thus, for companies with an accounting year corresponding to the calendar year, the first report on income tax information will relate to the year 2025 and will have to be published before the end of 2026.
Penalties
  • As such there are no stand-alone transfer pricing penalties for not maintaining a transfer pricing document. 
  • However, the absence of a document adequately evidencing the intra-group transactions could give rise to adjustments to the taxable income or attract related penalties for incorrect filing of the corporate tax return.
  • In accordance with the CbC legislation, a penalty of up to EUR 250,000 could be imposed on the taxpayer for non-compliance arising from non-filing, late filing or incorrect filing.
Economic analysis and how to demonstrate an arm’s length result
  • No preference for either internal, external, domestic or foreign comparables.
  • In accordance with the Circular, the determination of the minimum amount of equity-at-risk and related remuneration for a Luxembourg group entity undertaking financial intermediation activities should utilize economically suitable methods.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • APA is a written agreement between a taxpayer and LTA to govern the appropriate transfer pricing method for a forward-looking period (up to 5 years in total). 
  • Most APAs are unilateral and deal with the tax treatment of Luxembourg taxpayer’s intra-group transactions. 
  • A maximum filing fee of EUR 10,000 can be charged for APAs, which is fully payable within one month following the confirmation from the LTA of the amount to be charged.
  • In accordance with BEPS Action 14, Luxembourg incorporated the Mutual Agreement Procedure (“MAP”) into its bilateral tax treaties. 
  • MAP may be requested when a taxpayer considers that measures taken by one or both jurisdictions result in taxation not in accordance with the provisions of an applicable double tax treaty.
Exemptions
  • The Circular states that when a Luxembourg group financing entity meets the minimum substance requirements and carries out purely intermediary activity, the arm’s length principle should be met when a minimum return on the assets financed of at least 2% after tax is achieved. 
  • The percentage will be regularly revised by the Luxembourg tax authorities based on relevant market analysis.
  • It is worth mentioning that this minimal return cannot be applied to entities having different functional profiles. A transfer pricing document sufficiently evidencing the arm’s length remuneration should be performed.  
Related developments
Substance requirements
  • Pursuant to the Circular, a Luxembourg group entity involved in intra-group financial intermediation activities must maintain an appropriate level of substance in Luxembourg. 
  • The Circular stresses that the substance requirements, from a Luxembourg perspective, would be considered as met when:
    • A majority of the members of the board of directors or managers, who have the authority to bind the Luxembourg group financing entity, are either Luxembourg residents / non-residents who carry on a professional activity in Luxembourg or are subject to income taxation in Luxembourg on at least 50% of the income derived from their activities.
    • Luxembourg group financing entity employs qualified personnel with the necessary skills required to control and assume risks related to the financing intermediation activities performed. 
    • Key decisions concerning the management of the entity are taken in Luxembourg; and,
    • The entity is a tax resident only in Luxembourg.
  • The above-mentioned substance requirements should typically be met by any Luxembourg taxpayer involved in intra-group transactions to avoid recharacterisation of the intra-group transactions in any (relevant) jurisdiction or reassessment of the tax residency.  
COVID-19
  • MNEs should undertake a review of the existing transfer pricing policies to assess and monitor any potential exposure due to COVID.
  • Measures/decisions taken in the intra-group context during and post COVID should be adequately documented for future audits. 
  • Based on the industry of the taxpayer and the related intra-group transactions, utmost care should be taken when considering the applicable transfer pricing method(s), benchmarking strategy, year(s) under review when preparing the transfer pricing documentation.

For further information on transfer pricing in Luxembourg please contact:

Jean-Nicolas Bourtembourg.png

Jean-Nicolas Bourtembourg
T +352 (0) 45 38 78 1
E jean-nicolas.bourtembourg@lu.gt.com

 
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