Today’s investment management companies operate more and more in an integrated manner across multiple regions and functional groups, with many branches and legal entity subsidiaries in the different countries in which they operate. This means they are facing many complex transfer pricing issues.

While the early winds of change began to stir as long ago as 2010, legislation that sets in place an entirely new framework for transfer pricing in Luxembourg formed part of the first part of the government’s “Future Package” that was enforced on 19 December 2014, and has been effective since 1 January 2015. All multinationals with operations in Luxembourg are affected by the new rules to a greater or lesser extent. Key practical issues for taxpayers to consider include the way the new law restates the “arm’s length” principle, and as a separate measure, the need for documentation.

The “arm’s length” principle now applies to transactions between any two related entities or parts of a business, either where both are located in Luxembourg, or where one is taxed in Luxembourg, and the other in a foreign jurisdiction.

Standard disclosure and documentation requirements also now apply to transactions between related parties. One consequence of this change is that difficulties may arise whenever the Luxembourg tax authorities see that a transfer of profits might have occurred (because they conclude that the transaction under review does not comply with the “arm’s length” principle), and the facts and the basis for the pricing used are not made clear or documented by the taxpayer. The Luxembourg tax authorities may then look to the underlying economic reality of the operations, and presume that there has been an undue reduction in profits, without having to justify this in detail. Consequently, the absence of proper transfer pricing documentation could shift the “burden of proof” on to the taxpayer in this type of dispute.

Finally, as from 1 January 2015 the tax authority imposes an up-front fee of €10,000 for considering any request for an advance pricing agreement. The fee covers administrative and operational expenses. The process under which taxpayers can seek agreement in advance on pricing to be used is already long-established in many countries (as is the practice of levying an administrative fee in advance), and Luxembourg’s new regime is in all respects fully in line with existing guidance given by the OECD.

The impact on Luxembourg’s asset management industry

Given the importance of the asset management industry for Luxembourg, the country’s tax authorities will scrutinise the transfer pricing activities of asset managers.

Based on the new law, Luxembourg businesses operating in the asset management industry will need to be comfortable that they are satisfying the “arm’s length” principle for all their fee arrangements and other transactions with foreign or Luxembourg related parties. In addition, they will need to have transfer pricing documentation in place for those transactions.

Specifically, Luxembourg UCITS management companies, and AIFMs, will be most likely impacted by the new laws, as these service providers enter into numerous related party transactions.

Common transactions are all services transactions with related party portfolio managers, marketers, investment advisors, fund administrators, etc., all of which need to be for a fee that both complies with the arm’s length standard, and can be demonstrated as doing so. Such service fees might be expressed as a percentage of the total asset management fee, as a “cost plus” mark up for the service provider, or as a fixed number of basis points linked to the amount of assets under management, each depending on the value of the services within the business.

To evidence compliance, these services all need to be covered by transfer pricing documentation that complies with the OECD’s Transfer Pricing Guidelines. Such transfer pricing documentation would typically include a business overview, a functional analysis, and an economic analysis.

Author: Caroline Goemaere, Transfer Pricing Partner at PwC Luxembourg

Notes to the editor

1. PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach.

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