Intermediary Financing Services

I. Transaction details

  • ParentCo has entered into a Loan Agreement (Loan Payable) with LuxCo for an amount of EUR 10,000,000. In exchange, LuxCo has paid interests expense for an amount of EUR 148,000 (for the first year).
  • In turn, LuxCo has entered into a Loan Agreement (Loan Receivable) with GermCo for the same amount. In exchange, LuxCo has received interest income for an amount of EUR 150,000 (for the first year).

II. Characterization of the transactions

  • LuxCo is receiving funds on behalf of GermCo in order to conduct the acquisition of a building located in Germany (investment). Therefore, the transaction should be treated as equivalent to one single incoming and outgoing transaction and considered as intra-group financing services provided by LuxCo to GermCo.
  • LuxCo is performing loan origination activities and assuming equity risk on behalf of GermCo. Thus, this transaction is in line with the Transfer Pricing Luxembourg Circular’ requirements, therefore a transfer pricing study should be performed in order to determine the arm’s length remuneration (equity at risk remuneration).

Intermediary Financing Services

III. No transfer pricing study

  • If LuxCo does not prepare a transfer pricing study, LuxCo is exposed to the following risk:

Transfer pricing adjustment: the aforementioned Circular provides for an adjustment based on a minimum net income after taxes equal to 2% of the assets financed (over one year). For LuxCo, this means a transfer pricing adjustment for an amount of EUR 274,273.

IV. Transfer pricing study

  • If LuxCo prepares a transfer pricing study, LuxCo is not exposed to a transfer pricing adjustment, and should determine the following components:

o Amount of equity at risk: Based on a credit risk analysis of GermCo, it was determined that the amount of equity that LuxCo is assuming at risk on behalf of GermCo is equal to EUR 101,581.

o Equity at risk remuneration: Based on a capital asset pricing model, it was determined that the amount of equity at risk remuneration to be paid by GermCo to LuxCo is equal to EUR 156,613.

o Taxable income: As a consequence of the equity at risk remuneration, it was determined that the amount of taxable income is equal to EUR 8,613.

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