article banner
Global transfer pricing guide

Transfer pricing - Luxembourg

30 Aug 2023

Please click on each section to expand further:

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 56 bis 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 both upward and downward adjustments when Luxembourg group entities do not comply with the arm’s length principle.
  • Article 56 bis further provides detailed guidance to Luxembourg taxpayers and Luxembourg tax authorities (“LTA”) on how to apply the arm’s length principle.
  • On 27 December 2016, the LTA issued new guidelines reshaping the transfer pricing framework for entities carrying out intra-group financing activities in Luxembourg. The Circular L.I.R. n°56/1-56bis/1 (“Circular”) applies to any entity carrying out intra-group financing transactions.
OECD guidance
  • As an OECD member country, Luxembourg bases its domestic transfer pricing framework on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, released in July 2022 (“OECD Guidelines”).
  • Luxembourg’s TP framework doesn’t establish any preference or hierarchy for specific transfer pricing methods. 
     
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Following paragraph 3 of section 171 (§171 of the General Law), the Luxembourg tax legislation clarifies that taxpayers with 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 the absence of further guidance, reference is made to the OECD Guidelines and Action 13 of the Base Erosion Profit Shifting (BEPS) Action Plan.
  • On 28 March 2023, the Luxembourgish government introduced Bill No. 8186, a draft Grand-Ducal Regulation (the “GDR”) intended to overhaul Luxembourg TP documentation requirements. The GDR provides that, in accordance with the international standards resulting from the OECD BEPS Action 13 Report, thesedocumentation requirements may extend to the preparation of a Master File and a Local File. The GDR remains a draft law and has not yet received approved or been implemented into law. 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 concerning statements made in the tax returns. Additionally, such 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 without transfer pricing documentation.
  • The LTA accept transfer pricing documentation prepared in Luxembourgish, French, German, and English.
Master and local file
  • Currently, Luxembourg does not impose specific requirements for Master and/or Local file formats of TP documentation. Paragraph 3 of section 171 of the General Law requires taxpayers to be able to produce evidentiary support and justification for the pricing applied to their intercompany transactions upon request but does not impose specific format requirements on that documentation. The proposed GDR (Bill No. 8186) is intended to align Luxembourgish transfer pricing documentation requirements with OECD specifications.
  • The new GDR provides requirements on when to prepare a Master and/or Local file documentation. The thresholds proposed in the new GDR refer to the country-by-country requirements (EU Directive 2016/881). 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 EUR 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 EUR 100 million or assets of at least EUR 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.
  • Recurring short-term loans, lending arrangements with terms where borrower or lender behaviour is inconsistent with market expectations (e.g. loans with no repayments), etc
  • Business restructurings or changes in the TP model can also trigger a challenge. That said, businesses can evolve, and if the previous TP method no longer appears to be the most appropriate, it should always be reviewed rather than ignored for the sake of maintaining consistency.
CbC legislation in Luxembourg
  • Since 1 January 2016, Luxembourg has required multinational enterprise (MNE) groups with revenues exceeding EUR 750 million to comply with Country-by-Country (CbC) reporting obligations. The Luxembourg-based ultimate parent entity of such groups must submit an annual CbC report to the Luxembourg tax authorities (LTA). Additionally, all Luxembourg entities within an MNE group must notify the LTA of their reporting status, specifying whether they are the reporting entity or identifying which entity is responsible. The CbC report must be filed within 12 months after the fiscal year-end, while the notification is due by the last day of the reporting fiscal year.
  • To align with EU transparency requirements, Luxembourg introduced a draft law on 24 February 2023 to implement the Public CbC Reporting Directive (Directive (EU) 2021/2101). The directive mandates that MNEs—both EU-based and non-EU-based with operations in the EU—must publicly disclose key tax and financial information, including income, profits, corporate tax paid, and workforce distribution per country. This requirement applies to MNEs with consolidated revenues exceeding EUR 750 million in each of the last two financial years. The draft law was adopted in its first reading on 19 July 2023 and later enacted on 15 August 2023.
  • The new public CbC reporting obligations will take effect for accounting periods starting on or after 22 June 2024. Companies operating on a calendar-year basis will need to publish their first report covering 2025 by the end of 2026. Reports must be publicly available in an official EU language and accessible via either the Ultimate Parent Entity’s website or the Luxembourg Register of Commerce and Companies, where they will remain free of charge for at least five years.
  • Luxembourg has incorporated certain exemptions permitted by the directive. Companies may temporarily withhold specific data for up to five years if disclosing it would significantly harm their commercial position. Additionally, EU-based banks already complying with financial disclosure requirements under CRD IV are exempt from these new public reporting rules.
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 interna or 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
  • An APA is a written agreement between a taxpayer and the LTA to govern the appropriate transfer pricing method for a forward-looking period (up to five years in total).
  • Most APAs are unilateral and deal with the tax treatment of Luxembourg taxpayers’ 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.
  • The 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 a 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 minimum return cannot be applied to entities having different functional profiles. Transfer pricing documentation sufficiently evidencing the arm’s length remuneration should be prepared. 
Related developments
Substance requirements
  • Under 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.
    • The 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 the recharacterisation of the intra-group transactions in any (relevant) jurisdiction or a reassessment of its tax residency. 

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

 
Also appears under...