In the wake of the international tax overhaul which followed the adoption of the OECD BEPS (Base Erosion and Profit Shifting) Action Plan, the Luxembourg and European tax landscape has faced profound changes over the last decade, and transfer pricing is no exception. The aforementioned draft law and decree constitute a further outcome of this trend and yet presumably not an end point. In practical terms, it is mostly intended as a modernisation tool for current standards and a further exercise in compliance with the international standards resulting from Action 13 of the OECD BEPS Action Plan.

Whilst all Luxembourg companies remain subject to a general obligation to justify the compliance of their intra-group transactions with the arm’s length principle, this draft law and decree focus on the content of the transfer pricing documentation for Luxembourg constituent entities belonging to a group of multinational enterprises with total consolidated turnover of at least EUR 750 million during the previous tax year. With effect from tax year 2024, those entities will be required to provide, upon request, a local transfer pricing file and those with an individual turnover of at least EUR 100 million or a total balance sheet of at least EUR 400 million will be required to have a master transfer pricing file ready.

In a nutshell, the local file will be focused on intra-group transactions carried out locally whereas the master file will aim to provide an overview of the group, its activities and its global transfer pricing policy as well as distribution of profits at a global level. In practice, we believe that the provisions relating to the local file will merely add a certain degree of formalisation to existing transfer pricing obligations while the master file will add an additional layer of content obligations, rather than a formal documentation requirement.

In its current form, draft law no. 8186 does not provide for additional and specific penalties and, absent any local or master file (or if incomplete), the tax authorities will be allowed to proceed with any adjustments deemed appropriate based on information at their disposal, which could work to the taxpayer’s disadvantage.

One can wonder whether the EUR 750 million threshold will allow for an effective application of this legislation since the OECD estimates that it excludes some 85 to 90 per cent of multinational enterprise groups, especially in a context where other European countries have opted for lower thresholds. As an example, Ireland seems to have materially lowered the thresholds to encompass a larger amount of MNE groups, and resolved to add burden to smaller MNE groups. In that context, we fully support the different position adopted by Luxembourg not to lower these thresholds and avoid strengthening heavy transfer pricing justification obligations on smaller MNE groups. It would in our view also have made sense to introduce, such as some other EU countries and in line with OECD recommendations, more effective materiality thresholds (or simplification measures) for transfer pricing obligations in general so as to target substantial transactions only. 

Although the EUR 750 million threshold may have a limited impact on a substantial part of the Luxembourg market, all Luxembourg companies should carry out an in-depth review of their own situation to assess whether they could be subject to these reinforced transfer pricing reporting obligations, bearing in mind that all companies must be able to justify their transfer pricing policy, whether or not falling within the scope of the local and master file rules.

For further information on the transfer pricing obligations of Luxembourg companies, please contact Audrey Derep and Isabelle Absalon, transfer pricing experts at NautaDutilh.