Last Wednesday, 12 October 2016, the Luxembourg Minister of
Finance presented the 2017 budget and the related draft bill to the
parliament. Among social, environmental, and investment provisions,
tax professionals and taxpayers spotted the tax section introducing
a new set of rules for transfer pricing practice, in the form of
the new Article 56 bis LITL with new guidance and clarification on
transfer pricing regulations in Luxembourg.
After having introduced the basic principle of arm's length
into Article 56 ITL based on Article 9 of the OECD Model Convention
back in January 2015, this new article intends to add further
guidance on how to practically apply this principle based on the
latest version of Section D of Chapter I of the OECD Transfer
In the Declaration of Intent, the government intends to
incorporate some conclusions("des conclusions tirées dans le cadre des
actions BEPS 8-10") and basis
criterions (des critères de base à
respecter) drawn by the OECD under its BEPS initiative (action
8-10) into domestic law.
The draft bill introduces a more granular functional and risk
analysis based on the latest Transfer Pricing Guidelines for MNEs
and Tax Authorities (hereafter OECD Guidelines) with a focus on the
comparability analysis and the new tests as revised per the BEPS
initiative to delineate controlled transactions.
Once the definitions are set in paragraph 1, it is worth
mentioning that paragraph 2, 3, and 4 introduce commonly applied
concepts of comparability analysis into the law. It therefore
Should a related transaction not be
observable between independent parties does not mean this
transaction does not comply with the arm's length
Conditions between controlled
transactions and transactions between third parties should be
comparable, and economic characteristics should be comparable.
When adjustments are required for
comparability purposes, these should be reasonably reliable in
order to eliminate the impact on the pricing.
Taxpayers should identify the
transactions and determine the economically significant
characteristics and conditions in order to delineate the controlled
transactions and then compare them to the open market.
More practically speaking, it lists two key aspects for the
Identify the commercial or financial
relations between the associated enterprises and the conditions and
economically relevant circumstances attached to
those relations so that the controlled transaction is
accurately delineated; and
Compare the conditions and the
economically significant circumstances of the controlled
transaction as accurately delineated with those between independent
The delineation process is further detailed under paragraph 5
through a series of steps, again largely inspired by the words of
the OECD under BEPS action 8-10:
the contractual terms of the
the functions performed by each of
the parties to the transaction, considering assets used and risks
managed and assumed;
the characteristics of the
the economic circumstances of the
parties and of the market in which the parties operate;
the business strategies pursued by
Finally, once the transaction is adequately delineated, the
choice of the method (being any method detailed under chapters 2
and 3 of the OECD Guidelines) should allow the best approximation
of the arm's length price.
Last but certainly not least, the new paragraph 7 introduces a
general anti-abuse measure specifically for transfer pricing
purposes. In the event that a controlled transaction, or a part of
it, does not embed valid business rationale, taxpayers and tax
authorities should disregard it to determine the arm's length
Conclusions and take-aways
The proposed Article 56 bis strengthens the Luxembourg transfer
pricing rules and practice as it gives clarifications of the
methodologies available to reach conclusions on the arm's
length price when testing or setting prices in a related party
Taking into account the latest works under the BEPS initiative,
it will also introduce an anti-abuse rule specifically for TP
Regarding the specific point of documentation as laid down under
action 13 of the BEPS initiative, one may expect further
regulations introducing local and master file requirements while a
draft law on CbC Reporting is already available.
Taxpayers should therefore be prepared from FY 2017, and upon
request of the tax authorities, to sustain their controlled
transactions (including valid business rationale behind such a
transaction or series of transactions) through TP documentation
based on a more granular functional and risk analysis.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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