מחירי העברה: לוקסמבורג מאי 2011

Luxecirculars on intra-gpoup financing activities

On 28 January and 8 April 2011, the Luxembourg tax authorities clarified the domestic Transfer Pricing (TP) rules in two Circulars concerning companies involved in intra-group financing activities.

These Circulars give greater legal certainty for Luxembourg taxpayers, and detail the conditions for an ‘arm’s length’ (i.e. market) margin which was until then determined based on quite broad provisions of the domestic law.

General considerations
These Circulars refer to the OECD Transfer Pricing Guidelines, and consider that anintra-group service has been rendered if, in comparable circumstances, an independent enterprise would have been willing to pay another independent enterprise for such an activity, or if it would have performed such an activity itself. The Circulars also specify the conditions to be met in order to obtain a binding advance transfer pricing agreement (APA) from the Luxembourg tax authorities.

Entities within the scope of the Circulars
The Circulars apply to entities which conduct activity consisting of the granting of loans or cash advances to affiliated companies, refinancing funds and financial instruments such as public offerings, private loans, cash advances or bank loans (excluding holding activities).

Conditions for obtaining an APA from the tax authorities
An APA which is binding on the tax authorities will be provided on the gross margin to be realised on the intra-group financing activity only if:

• The majority of the members of the board, directors, or managers, who have the authority to bind the group financing company, are either Luxembourg residents, or non-residents who carry on a professional activity in Luxembourg. Where a corporate entity is a member of the board of directors/managers, its registered office and central administration must be located in Luxembourg;
• Members of the board of directors referred to above have professional knowledge to fulfill their duties and the authority to bind the company;
• Key decisions concerning the company’s management are taken in Luxembourg;
• The group company has sufficiently skilled staff;
• The group financing company has at least a bank account in its own name at a financial institution established in Luxembourg;
• The company’s equity is at least equal to 1% of the nominal value of the loan(s) granted to affiliated companies, or EUR 2 million.

Content of the request
All requests for an APA should include at least the following information:

• Specific information on the requestor and on the entities which are party to the transaction;
• A detailed description of the transaction;
• Any other country or countries affected by the transaction;
• A presentation of the group’s legal structure, including information concerning the beneficial owner of the requestor’s entity;
• The tax years covered by the request;
• A TP study in line with OECD Transfer Pricing Guidelines;
• A general description of the market environment;
• A review of any pertinent ancillary tax issues raised by the proposed methodology;
• A confirmation by the taxpayer that the information reported in the APA is comprehensive and truthful.

Validity period
Decisions given from 28 January 2011 by the relevant tax office will be binding on the tax authorities for a maximum period of 5 tax years, which may be renewed for another maximum period of 5 tax years. APAs obtained before 28 January 2011 should remain valid until 1 January 2012.

Conclusion
The impact of these Circulars must be analysed on a case by case basis. Neither the APA nor the TP study are mandatory. However, in the absence of such documentation, the Luxembourg tax authorities may challenge the amount earned by the taxpayer. In case an APA cannot be requested, a TP study in line with the OECD Guidelines should be sufficient to sustain that the applied margin is at arm’s length.

From 1 January 2012, the tax authorities will no longer be bound to APAs obtained before 28 January 2011. In this context, taxpayers who want to benefit from a new APA concerning their intra-group financing transactions will need to file a new APA in line with the above listed requirements. Practice will fine tune these new rules to reach a top level of compliance with internationally accepted TP standards.

Caveat
Other countries - the Netherlands is a very good example - have similar rules for intra group financing structures, including the possibility of agreeing an APA with the tax authorities.

**The information contained on this website and from any communication related to this website is for informational purposes only and does not constitute any legal, financial or other advice. For specific tax advice you should contact a qualified professional.