Luxembourg Tax Authorities

In December 2016, a new Article 56bis was introduced in the Luxembourg Income Tax Law (“LITL”), and a new administrative Circular, L.I.R. 56/1 – 56bis/1, was released. As a consequence of these new transfer pricing regulations, it is important for taxpayer to pay attention to the following points:

  • Intercompany transactions:. Paragraph 7 of Article 56bis clarifies the following:

“…transactions between the parties can be disregarded for transfer pricing purposes, if [part of] the transaction does not possess the commercial rationality of arrangements that would be agreed between independent parties…”

The transfer pricing obligation is extended to any type of intercompany transactions, meaning that any taxpayer subject to the provisions of the arm’s length principle in the LITL needs to evidence how the arm’s length price was determined.

  • No transfer pricing study or safe harbor: Paragraph 27 of the Circular L.I.R. 56/1 – 56bis/1 states:

“In case the finance company does not have a profile of an intra-group bank, but rather intervenes as an “agent” in a financing transaction, the arm’s length remuneration should be equal to a net income (after taxes) of 2% on the assets financed (i.e. loan agreement)”

  • Transfer pricing study: Paragraph 28 of the Circular L.I.R. 56/1 – 56bis/1 states:

“However, the arm’s length remuneration (or safe harbour of 2%) does not apply if a transfer pricing report is prepared, in line with the OECD Guidelines and the Luxembourg Circular, which determines a different return”

No specific form is required by law. However, according to current market practice, i) a simplified transfer pricing analysis can be performed for transactions below EUR 25 million and ii) some integral transfer pricing documentation should be put into place for transactions above the threshold of EUR 25 million. The documentation should be fully aligned with substance requirements, business plan and documents related to the structure.

  • No exemption from transfer pricing obligation: There is no exception in the application of the transfer pricing requirements so that they apply to any type of commercial transactions carried out between any related commercial parties.

OECD BEPS Action Plan

  • Action 3: The Anti-Tax Avoidance Directive (ATAD) rules lay down common minimum rules in the area of controlled foreign companies (CFC) in line with Action 3.
  • Actions 8-10: The aforementioned new Article 56bis of the LITL is in line with Actions 8-10.
  • Action 13: The country-by-country (CbC) reporting requirements is in line with Action 13.
  • OECD Guidelines: On July 2017, the new edition of the transfer pricing guidelines was released; it mainly reflects a consolidation of the changes resulting from the OECD/G20 base erosion and profit shifting (BEPS) project.

EU Anti-Tax Avoidance Package

In January 2016, the European Commission proposed an Anti-Tax Avoidance Directive (“ATAD”), setting out legally-binding anti-abuse measures for the entire EU. Member States adopted this ambitious new piece of legislation within 6 months; it will enter into force in 2019.

The Commission complemented the Directive with measures to tackle tax loopholes (“hybrid mismatches”) in relation to third countries (ATAD 2), which Member States adopted at the end of May 2018. A review of preferential regimes (such as so called “patent boxes”) and transfer pricing rules was also launched, to prevent them from being used for tax avoidance reasons.

EU State Aid Investigations

  • Fiat Finance and Trade and Starbucks Manufacturing: On October 21, 2015, the European Commission decided that Luxembourg and the Netherlands had granted selective tax advantages to Fiat Finance and Trade and Starbucks Manufacturing, respectively. These selective advantages are illegal under EU state aid rules.

o Fiat Finance and Trade: The Commission’s investigation concluded that a tax ruling issued by the Luxembourg authorities in 2012 gave a selective advantage to Fiat Finance and Trade, which has, according to the Commission,  unduly reduced its tax burden since 2012 by EUR 20 to EUR 30 million.

o Starbucks Manufacturing: The Commission’s investigation concluded that a tax ruling issued by the Dutch authorities in 2008 gave a selective advantage to Starbucks Manufacturing, which has, according to the Commission, unduly reduced Starbucks Manufacturing’s tax burden since 2008 by EUR 20 to EUR 30 million.

  • Amazon: On October 4, 2017, the European Commission announced its final decision on its state aid investigations into transfer pricing rulings granted by Luxembourg to the Amazon Group. In its decision the Commission ruled that the rulings in question might underestimate the taxable profits of the Amazon Group by deviating from the arm’s length principle, and therefore constituted an illegal state aid. The Commission estimated the value of the competitive advantage granted to have reached EUR 250 million.
  • McDonald’s and GDF Suez: The European Commission also has two ongoing in-depth investigations related to tax rulings that may give rise to state aid issues in Luxembourg concerning McDonald’s and GDF Suez (now Engie).

Tax Transparency

The Commission considers tax transparency to be one of the key pillars for a fair tax system and a properly functioning internal market, and in the table below lists a series of initiatives in this area.

Source: European Parliament / Legislative Observatory, updated as of 23 March 2018.

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