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Flash News Luxembourg – New transfer pricing regime applicable as from 1 January 2015
13 January 2015
The Luxembourg Parliament has enacted on 19 December 2014 the first part of the “Zukunftspack” (bill n°6722), thereby officially introducing a new general transfer pricing regime taking effect as from 1 January 2015. The new rules elaborate the arm’s length principle and introduce transfer pricing documentation requirements.
The Luxembourg Parliament has approved the draft law on the implementation of the first part of the “Zukunftspack”, which had been released earlier in 2014 as part of the 2015 Budget Law. This Law of 19 December 2014 was officially published on 24 December 2014 in the “Memorial – Journal Officiel du Grand-Duché de Luxembourg” and it includes changes to both the Luxembourg Income Tax Law of 1967 (LITL) and the general tax law. These changes formalise the framework of the transfer pricing legislation, and introduce transfer pricing documentation requirements. The new legislation restates the arm’s length principle, and as a separate measure makes explicit the need for documentation. The new measures have already taken effect as from 1 January 2015.
General transfer pricing legislation Based on the previously existing text of the legislation, the Luxembourg tax authorities had the power to estimate the financial result of a Luxembourg taxpayer, whenever a transfer of profits had occurred and had been made possible by the fact that a taxpayer has a special economic relationship with a non-resident taxpayer. With the Law of 19 December 2014, article 56 LITL is now replaced by the following text: “When an enterprise participates, directly or indirectly, in the management, control or capital of another enterprise, or where the same individuals participate, directly or indirectly, in the management, control or capital of two enterprises and where, in either instance, the two enterprises are, within their commercial or financial relations subject to conditions made or imposed which differ from those which would be made between independent enterprises, the profits of these enterprises are to be determined under conditions prevailing between independent enterprises and taxed in consequence.”
Whereas under the previously existing law, the concept of related parties was broadly defined (i.e. any special economic relationship), the new text outlining the arm’s length principle becomes aligned with the OECD Tax Model Convention. One consequence is that the arm’s length principle is, as from 1 January 2015, to be applied to transactions between two related entities both located in Luxembourg, as well as where one party is taxed in a foreign jurisdiction. Moreover, the new text obliges the taxpayer to report in its tax return either an upward or downward adjustment of profits whenever transfer prices do not reflect the arm’s length principle. Although not explicitly provided in the new legislation, it should still be expected that some of the many questions concerning the practical aspects of the new legislation will be further detailed by way of Grand-Ducal Regulations or Administrative Circulars.
Documentation In the past, Luxembourg tax legislation did not contain specific or express provisions governing transfer pricing documentation. Nevertheless, taxpayers did already have an obligation under the general tax law to be able to support the data included in their tax return. The Law of 19 December 2014 introduced a new subparagraph in paragraph 171 of the general tax law that makes this obligation explicit in the context of transfer price setting, by providing that the existing law “shall apply accordingly to transactions between related parties”. This new subparagraph hence clarifies that, as from 1 January 2015, normal disclosure and documentation requirements also apply to transactions between related parties. The Luxembourg tax authorities may request from the taxpayer all facts relevant for verifying a tax liability. For this purpose, the taxpayer is required to provide all necessary supporting documentation to facilitate the task of the Luxembourg tax authorities. The new subparagraph makes it clear that this obligation to provide documentation is now applicable when the Luxembourg tax authorities are seeking to verify transfer prices. One consequence of this change is that, whenever the Luxembourg tax authorities have reason to consider that a transfer of profits might have occurred (because the transaction under analysis does not comply with the arm’s length principle) and the facts are not made clear or documented by the taxpayer, the Luxembourg tax authorities may 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 exactly. Hence, the absence of proper transfer pricing documentation could result in a reversal of the burden of proof towards the taxpayer. No explicit documentation requirements are imposed by the Law of 19 December 2014. The nature and extent of the documentation needed depends on the circumstances of the case under consideration. The expectation of the level of documentation needed should be lower for straightforward corporate transactions, or for those undertaken by small businesses. Lastly, the Commentary on the text of the Bill has already pointed out that Chapter V of the OECD Transfer Pricing Guidelines – referred to in the Commentary as being the
“directing principles relating to documentation” – are being revised. Hence, once the revision of Chapter V is completed Luxembourg will expect taxpayers to apply the “three-tiered” approach to documentation, which will include the Country-by-Country Report obligations, deriving from Action Point 13 of the OECD’s BEPS Action Plan.
Advance Pricing Agreements (APAs) Another component of the Law of 19 December 2014 does not specifically concern transfer pricing, but is highly relevant. For all aspects of the direct tax system, a revised and unified system for all advance tax confirmations came into force. The new system includes any form of APAs. The aim remains to provide taxpayers with legal certainty for their transactions, while offering a uniform and egalitarian treatment between taxpayers and, importantly, increasing the transparency of the Luxembourg tax system. Fees, varying from EUR 3,000 to EUR 10,000 depending on the complexity of the matter, apply as from 1 January 2015 to cover the administrative and operational expenses of the tax administration in reviewing advance tax confirmation requests. The procedure for requesting any advance tax confirmation has already been further detailed in a Grand-Ducal Regulation dated 23 December 2014. The Grand-Ducal Regulation clarifies that the competent tax authority will now have to seek advice for advance tax confirmations from a tax rulings commission, the “Commission des decisions anticipées”, which will guarantee a uniform and egalitarian treatment between taxpayers. All advance tax confirmations given are to be published in a summarised way and anonymously in the annual report of activities of the Luxembourg direct tax authorities. Finally, the administrative fees are due and fully payable within one month following confirmation by the tax authorities of the amount to be charged, following their initial review of the advance tax confirmation request. The advance tax confirmation sought will be issued only after receipt of the payment. The payment is non-reimbursable, even when the request is withdrawn by the taxpayer or if a negative decision has been reached.
Conclusions The new legislation should be seen as an extension and clarification of the previously existing tax law, including as from now on an explicit application within Luxembourg of the OECD concepts of transfer pricing. In view of the attention and resourcing now increasingly being given to transfer pricing matters by the Luxembourg tax authorities, all Luxembourg taxpayers should ensure that their transfer prices are consistent with the arm’s length principle, and are supported by sound transfer pricing documentation.
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