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Transfer Pricing in Luxembourg:             Phase 2



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Danny Beeton, Of Counsel, Arendt & Medernach Photo : Arendt

Comprehensive transfer pricing rules have been introduced into Luxembourg and the tax administration has collected transfer pricing information from Luxembourg businesses.  Phase 2 will involve tax administration challenges to transfer pricing arrangements followed, in some situations, by litigation.

Fortunately, the tax administration has resumed its invitation to request long-term agreements about the tax treatment of transfer pricing arrangements, so the time is right to identify potential transfer pricing challenges, make the policies and documentation as robust as policy, and approach the tax administration for an agreement, where appropriate.  If it is already too late for some businesses, there are helpful lessons from recent Luxembourg cases.

Transfer Pricing Obligations

Luxembourg businesses are required to determine and use the prices which unrelated parties would have charged, and to follow a prescribed methodology for related party financing.  They must be in a position to hand over documentation to show that this is what they have done, and the burden of proof will be (uniquely) on the taxpayer.

Transfer Pricing Risks

The tax administration will have access to the annual ‘country-by-country’ report of activity, profits and tax paid by country which larger businesses have to submit in their headquarters jurisdiction.  It can also refer to the answers to two transfer pricing questions in the annual form which accompanies the Luxembourg tax return.

Any additional tax which the administration may then assess may be considered to be a non-deductible hidden profit distribution or capital contribution, and the latter would potentially be subject to a 15% withholding tax.

Dealing with Disputes

If a tax audit does lead to litigation, the taxpayer will need a mixture of legal and economic support – legal, to clarify the relevant statute and case law and the exact reading of any transfer pricing contracts, and economic, to provide an opinion on the commerciality of the related party dealings.  It will be important to provide the court with fresh and impartial views.

Unfortunately, recent transfer pricing cases have gone badly for the taxpayer – in one case, because it had no contemporaneous support for the 12% interest rate on its real estate loan, and submitted two inconsistent transfer pricing reports to the court, and in another, because it could not provide a commercial justification for waiving some loans to its subsidiaries.  The lessons of these experiences may be to research the arm’s length price and record how this was down, to draft a contract that reflects the real capability and role of each party to the transaction, and then to operate (or change) that arrangement in the way that independent parties would have done.

Achieving More Certainty

Across the EU, advance transfer pricing agreements with tax administrations are becoming a more successful route for achieving tax certainty, especially ones which are agreed with both tax administrations.  In any case, as tax administrations are now required to keep other affected tax administrations informed of what they agreeing with taxpayers, the case for approaching both tax administrations for a formal agreement has become stronger.

Next event: Annual Transfer Pricing Forum on 16 October at 8am at Arendt House.

Danny Beeton is Of Counsel in Arendt & Medernach and works in their London and Luxembourg offices