Taxing authority and tax law
Tax authority: The Luxembourg Tax Authorities
Tax law: Income Tax Law (ITL), General Tax Law
Relevant regulations and rulings
The Luxembourg ITL contains two articles relating to transfer pricing: Article 56 ITL on Transfer of Business Profits and Article 164(3) ITL on Hidden Profit Distribution. Both articles encourage the general application of the arm’s length criteria for transactions between related parties. The ITL does not, however, contain any other specific guidelines or regulations. Moreover, the Luxembourg tax authorities have not issued any specific guidelines or regulations.
OECD guidelines treatment
OECD TP guidelines are not officially enacted in Luxembourg tax law. However, even though there is no official publication in this respect, the Luxembourg tax authorities usually refer to the OECD transfer pricing guidelines for assessing the arm’s length character of inter-company transactions. Considering that OECD TP guidelines are not enacted into Luxembourg ITL, the arm’s length nature of inter-company transactions may also be established with reference to other generally accepted TP guidelines or regulations.
Priorities/pricing methods
There are no specific pricing methods mentioned in the ITL. All methods advocated by the OECD are acceptable under the current administrative practice, such as CUP, Resale Price, Cost Plus method, TNMM, and Profit Split. There are no priorities established between the different methods.
Transfer pricing penalties
To the extent that the arm’s length criteria is not respected, the tax authorities may reassess and/or adjust the taxable result but no penalties are foreseen in the tax law for the case that such adjustments are made.
Penalty relief
Since there are no specific transfer penalties in the tax law, there are no specific provisions for reductions in penalties.
Documentation requirements
Luxembourg general tax law includes general documentation requirements, but does not provide for specific transfer pricing documentation regulations. Thus, intercompany transactions should always be supported at least by appropriate agreements and other supporting legal documentation. The tax authorities may, however, request complementary information supporting the transfer prices applied on intercompany transactions at the time they are executed. Reference is generally made to OECD guidelines for adequate documentation.
Luxembourg is also adhering to the EU code of conduct on transfer pricing documentation for associated enterprise in the EU. As a consequence, contemporaneous TP documentation available at head-quarter level may also be used in Luxembourg to support the arm’s length nature of intercompany transactions.
Documentation deadlines
As a general rule, contemporaneous documentation should exist when transactions are carried out. That rule also applies in relation to transfer pricing documentation. As the tax law does not contain specific TP documentation regulations, Luxembourg tax law does neither include a deadline to produce TP documentation. The tax authorities may, however, request in the context of an audit that TP documentation is provided within a certain delay. Such delay may be as short as a couple of weeks, but might be extended upon request.
Statute of limitations on transfer pricing assessments
There are no specific limitations on transfer pricing adjustments. The general rules apply. The statute of limitation is, in principle, five years starting from 1 January of the calendar year following the relevant tax year. In case of incomplete tax returns or no tax returns filed as well as in case of fraud, the statute of limitation is extended to 10 years. Moreover, once a Luxembourg company has been finally assessed for income and net wealth tax purposes for a particular year, the tax authorities may not reassess the relevant tax year unless they have obtained new information and the statutes of limitation is not yet applicable. As long as the tax authorities have issued a provisional tax assessment, the taxable base may still be adjusted after the issuance of the provisional assessment until the statutes of limitation is acquired.
Return disclosures/related-party disclosures
There are no specific disclosures required when filing tax returns. It is, however, common practice that transactions with related parties are detailed by nature and a related party breakdown included the tax returns.
Audit risk/transfer pricing scrutiny
The risk of transfer pricing being reviewed under an audit is medium.
APA opportunity
Although no formal advance pricing agreement procedure exists in Luxembourg, the tax authorities may express an opinion on transfer prices used by taxpayers on a case-by-case basis. In that respect, advance clearance can be sought from the Luxembourg tax authorities on the intercompany transfer prices being applied.
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