Luxembourg: Transfer Pricing In Luxembourg 3.0 – The Emerging Relevance Of Tax Audits And Recent Luxembourg Case Law

Last Updated: 29 April 2019
Article by Oliver R. Hoor

Over the last few years, transfer pricing and related documentation has become the hot topic in Luxembourg taxation in an evolving environment that is relying increasingly less on tax rulings (including advance pricing agreements). In the past, taxpayers have viewed tax rulings as a way to provide legal certainty and to mitigate tax risks relating to investments and intra-group transactions. However, for a number of reasons this is no longer the case.

More tax audits on the horizon

In the past, tax audits have not been a common phenomenon in Luxembourg. However, tax audits are now performed more systematically by the Luxembourg tax authorities since the creation of a new tax audit division.

In 2010, the Luxembourg legislator introduced a new paragraph 100a to the General Tax Code (Abgabenordnung) that allows the Luxembourg tax authorities to issue preliminary tax assessments on the basis of the statements made in the tax returns. This change was meant to speed up the tax assessment process. When a preliminary tax assessment is issued, the Luxembourg tax authorities have the possibility to review the tax returns within the following five years. Thus, the Luxembourg tax authorities generally have the possibility to review up to five open tax years.

Since the introduction of this provision, final assessments are rather the exception despite taxpayers may always ask for a final assessment in specific cases. This means that potential tax risks may span over several years which requires an appropriate and active tax risk management function.

Experience shows that transfer pricing is always in the focus of tax audits and the tax authorities can more easily challenge transfer pricing when no transfer pricing documentation is prepared. After all, how could taxpayers take informed decisions if no transfer pricing analysis has been performed before the pricing of intra-group transactions has been determined? Therefore, transfer pricing should always be considered before agreements are concluded.

Decision of the Tribunal Administratif

Transfer pricing was also at the heart of a decision of the Tribunal Administratif (Case n° 40348, decision of 22 October 2018) that had to decide in a case where a Luxembourg company ("LuxCo") received a shareholder loan bearing interest at a rate of 12% to finance real properties situated in France.

The Luxembourg tax authorities challenged the arm's length nature of the interest rate and considered rates of respectively 3.57% and 2.52% being appropriate for the fiscal years 2011 and 2012.

It is interesting to note that LuxCo prepared two transfer pricing reports. While the first one has been produced in the course of the tax audit, the second transfer pricing report was prepared at a later stage and filed with the claim lodged with the Tribunal. The first transfer pricing report benchmarked an arm's length range spanning from 3.21% to 7.88%, whereas the second transfer pricing analysis determined an arm's length range spanning from 9.95% to 19.61%.

The admission of the first report was not disputed even though it has been prepared after the request of the Luxembourg tax authorities. However, the admission of the second transfer pricing report was put into question by the Luxembourg tax authorities. The Tribunal did only consider the first report despite the second transfer pricing analysis was formally admitted to the trial.

In its decision, the court followed the view of the Luxembourg tax authorities that the 12% interest rate was not sufficiently substantiated and considered that the interest rate did not adhere to the arm's length principle.

Without having more information on the two transfer pricing reports, the significant difference in the arm's length ranges suggests that at least one of the reports was relying on inappropriate assumptions and comparables. The decision confirms the relevance of transfer pricing documentation and the need or preparing a transfer pricing analysis at the time taxpayers enter into intra-group transactions. While it is possible to produce transfer pricing documentation upon request of the Luxembourg tax authorities, taxpayers are generally in a better position if they take a pro-active stance on determining and documenting transfer prices.

The Importance of Transfer Pricing Documentation

As a matter of principle, the arm's length character of intra-group transactions should be substantiated in sound transfer pricing documentation. Despite the fact that Luxembourg tax law does not specifically require the preparation of transfer pricing documentation, taxpayers are under a duty to co-operate with the Luxembourg tax authorities and have to evidence facts and provide information in regard to statements made in the tax returns.

When the Luxembourg tax authorities can reasonably evidence that the transfer pricing of an intra-group transaction does not adhere to the arm's length principle, it is the responsibility of the taxpayer to disprove this rebuttable presumption.

Another factor to be considered is that transfer prices may be reviewed several years after a transaction takes place. This makes it increasingly more difficult from a practical perspective to trace back relevant facts and circumstances of the transaction as well as data on comparable transactions. This evidently exerts pressure on Luxembourg companies to develop and apply appropriate transfer pricing policies for risk mitigation purposes.

Best Practice Recommendations

Transfer pricing inevitably compels taxpayers to find a balance between a comfortable level of security and the costs for the preparation of sound transfer pricing documentation. In practice, Luxembourg companies should screen major intra-group transactions in order to identify specific issues that could raise suspicion on the part of the tax authorities and assess the magnitude of related tax risks.

The effort and resources used to determine and document arm's length conditions should be proportionate to the significance of the intra-group transaction. Hence, there is no "once size fits all" approach. Instead, a reasonable approach might be to produce full-fledged transfer pricing documentation for all significant intra-group transactions, whereas for less significant transactions a light documentation may be appropriate that focuses on the economic analysis. For insignificant transactions that entail limited tax risks, taxpayers may adopt a reasonable approach without producing any transfer pricing documentation.

It is also important that transfer pricing policies are not disregarded after their implementation. As a matter of best practice, taxpayers should review their transfer pricing documentation at least once a year in order to assess whether the fact pattern is still consistent with reality and to determine whether an update might be necessary. Although taxpayers may reasonably rely up to 5 years on transfer pricing documentation assuming that the circumstances of the controlled transaction did not change, the more the situation changes, the less taxpayers can reasonably rely on the documentation.

Ultimately, transfer pricing documentation has become a key element in tax risk management. Its role will only increase in the years to come. Taxpayers should not consider the preparation of transfer pricing documentation as a compliance exercise. Instead, in the current international tax environment of heightened transparency and scrutiny, Luxembourg companies would be wise to take it one step further and to integrate the documentation of transfer prices in their wider tax strategy, using it as a means to reflect the business rationale behind their investment structure and intra-group transactions.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions