Legal Framework and OECD Alignment
Luxembourg’s transfer pricing principles are primarily based on Article 56 and new Article 56bis of the Luxembourg Income Tax Law. These rules align with the OECD Transfer Pricing Guidelines. Luxembourg’s tax authorities can make adjustments to transactions between connected firms if they don’t meet the arm’s length norm.
Intra-Group Financing Transactions
Specific provisions apply to Luxembourg companies engaged in intra-group financing transactions. These companies are expected to have genuine substance, bear economic risks, and report arm’s length remuneration on their financing activities, supported by a transfer pricing analysis.
Transfer Pricing Documentation Requirements
While Luxembourg doesn’t require contemporaneous transfer pricing documentation, taxpayers engaged in intra-group transactions must maintain such documentation. This documentation must be provided to tax authorities upon request, with a reasonable timeline determined by the authorities.
Laws & Regulations
The legal framework for transfer pricing in Luxembourg is primarily defined in Article 56 of the Luxembourg Income Tax Code and the general tax law. A more detailed framework was introduced in the Law of 19 December 2014, which aligned with the OECD’s arm’s length principle.
Definition of Related Party
Luxembourg follows the OECD model tax treaty’s definition of related parties. These relationships can be established through various criteria, including shareholding, common management, and other forms of control.
Nature of Transfer Pricing Documentation
Luxembourg is an OECD member and adheres to the OECD Transfer Pricing Guidelines.
Tax Havens & Blacklists
A law prohibiting the tax deductibility of interest and royalties to enterprises in countries on the EU’s list of non-cooperative jurisdictions (“EU Blacklist”) was enacted. This law follows EU Council recommendations to take national defense actions regarding EU Blacklist jurisdictions.
Advance Pricing Agreement (APA)
Luxembourg introduced regulated APA procedures to provide legal certainty to taxpayers. The APA process is also extended to other intra-group services. Tax rulings and APAs may be subject to exchange of information with other EU Member States.
The tax authorities can request transfer pricing documentation to determine whether taxpayers are engaged in intercompany transactions complying with the arm’s length principle.
Transfer Pricing Documentation
The level of documentation in Luxembourg involves a Master File that discloses general information about the group and a more detailed Local File, focusing on industry analysis, economic analysis, and functional analysis.
Economic Analysis – Benchmark Study
Local comparables are preferred, but other comparables from different geographical regions are acceptable if the reliability of local comparables is insufficient.
Inter-company (IC) Legal Agreement
Inter-company legal agreements have less significance as the “conduct of parties” is emphasized, aligning with the OECD 2017 Guidelines.
CbC reporting is applicable to entities with consolidated annual group turnovers exceeding EUR 750 million. If the group doesn’t prepare consolidated financial statements, an equity interest analysis is used to determine CbC reporting requirements.
Production Process for TP Relevant Returns
Various transfer pricing documentation, returns, and forms must be filed based on their formats, deadlines, notification requirements, and language preferences. Luxembourg tax authorities accept documentation in official languages, including Luxembourgish, French, German, and English.
Entities must notify the tax authorities regarding CbC reporting by the end of the financial year. Penalties may be imposed for incomplete or inaccurate notifications.
Luxembourg’s general income tax rules apply to transfer pricing record-keeping, requiring all documentation relevant for determining taxable profits to be retained for ten years.
Penalties and Interest Charges
Penalties for transfer pricing assessments can be substantial, reaching up to four times the evaded tax in cases of evasion or ten times in cases of fraud. The burden of proof shifts to the taxpayer in the absence of sufficient documentation.