If Luxembourg had already, for decades, general anti-abuse provisions that could be used by the tax authorities for potentially adjusting prices to transactions between a Luxembourg resident and an alien with which it had “special economic relationship”, it is only in 2010 that the Luxembourg tax authorities issued a Circular aiming at surrounding the transfer pricing rules applicable to intra-group financing arrangements. Within the context of the Amazon and Fiat EU – Commission investigations for State aid, and the OECD – BEPS initiative, a further step has been taken by the new Government coalition in its 2015 Budget proposals presented on 15th of October.
Where the Circular on intra-group financing arrangements was based on a specific provision of the law regarding hidden transfer or benefits, the new provisions to be incorporated into the General Tax Law and the Income Tax Law edify transfer pricing rules in Luxembourg as a new standard for numerous set of transactions between Luxembourg residents and cross-border arrangements.
The current Article 56 of the Income Tax Law drafted as a general anti-abuse provision is about to be reshaped for covering the economic and financial relationships that should prevail between associated parties when they are placed in comparable situations. In other words, Luxembourg should have its own general transfer pricing rule now embedded into the Law as from 2015. It is currently expected that specific and detailed regulations on transfer pricing should be issued through Grand Ducal Decrees over the year 2015 and onwards.
The main features of the system to be applied are based on the arm’s length1 principle enshrined in Article 9 paragraph 1 of the OECE – Tax Model Convention and it is moreover intended that the Luxembourg Government will get some inspiration from current transfer pricing legislation already in place in some EU – countries and will by the way also follow of the EU – Code of Conduct recommendations on standard good practices in transfer pricing documentation matter.
The Luxembourg Government intention is clearly to induce a change in the way associated parties justify the arm’s length character of their commercial and/or financial relationships. The 2015 Budget Bill of Law wants to make its point on this by introducing explicit obligations for taxpayers to provide for good and relevant transfer pricing documentation. Indeed for those who will fail at producing proper transfer pricing documentation, tax authorities will have the ability to put onto them the burden of proving of the arm’s length character of any specific transaction. Ultimately if the documentation is not satisfactory enough for the tax authorities, these will have the right to consider an undue reduction in taxpayer profits and impose a lump sum extra tax charge by adjusting the taxable base.
If it is true that this new transfer pricing legislation will imply for taxpayers cumbersome work and additional expenses when setting up or making additional investment in a Luxembourg structure, they deserve credit for making Luxembourg as a trustfully tax jurisdiction for foreign tax administration and as such maintain Luxembourg as a preferred hub for locating headquarters and international tax structures.
For tax advisers either, implementation of transfer pricing rules covering a large scale of transactions types could be challenging depending on timing into which such new transfer pricing requirements and guidelines (which will come along with the issuance of the TP Grand Ducal Decrees) will have to be implemented.
1 Article 9 of the OECD Tax convention model considers that arm’s length principle is questioned in a situation where “conditions are made or imposed between two (associated) enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises”.