LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
per fiscal year, the withholding tax constitutes the final tax, unless the director opts for assessment. A 10% withholding tax applies to income from inde - pendent literary or artistic activities and from profes - sional sports activities performed in Luxembourg. Wages are subject to withholding tax at progressive rates. 4.2 Key Treaty Jurisdictions for Inbound Investment Luxembourg has signed a total of 94 double tax trea - ties, of which 88 are currently in force. Most of these treaties follow the structure and principles of the OECD Model Tax Convention. On 7 June 2017, Luxembourg signed the Multilateral Convention (MLI) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). The MLI entered into force in Luxembourg on 1 August 2019. Given the required national ratification procedures and the implementation timelines set out in the MLI, the impact across treaties did not occur simultaneously. However, for many of Luxembourg’s tax treaties, the principal purpose test (PPT) has been applicable since 1 January 2020. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices Luxembourg rarely challenges the application of tax treaties. Nonetheless, domestic legislation includes a general anti‑abuse rule (GAAR), as well as the anti‑abuse provision of the EU Parent–Subsidiary Directive, under which treaty or directive benefits may be denied when an arrangement is primarily designed to obtain a tax advantage. Since 1 January 2019, Luxembourg’s domestic GAAR has been aligned with the wording of ATAD 1, intro - ducing the concept of a “non‑genuine arrangement”. Under this rule, a transaction may be disregarded or recharacterised when all of the following conditions are met: • the arrangement involves the use of one or more legal forms or legal structures;
• the main purpose, or one of the main purposes, of using such legal forms or structures is to obtain a tax benefit that defeats the object or purpose of the applicable tax law; and • the use of such forms or structures is considered non‑genuine. In addition, since 1 January 2020, the principal pur - pose test (PPT) has applied to Luxembourg’s tax trea - ties. Under the PPT, treaty benefits may be denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of an arrangement or transaction that directly or indirectly gave rise to that advantage. 4.4 Transfer Pricing Issues for Inbound Investors Inbound investors establishing or operating a Lux - embourg corporation (LuxCo) typically face several recurring and material transfer pricing (TP) challenges. These arise from the way Luxembourg applies the arm’s length principle through Articles 56 and 56bis LITL and the OECD Transfer Pricing Guidelines. Lux - embourg has no integrated transfer pricing legislation. Luxembourg places particular emphasis on the TP treatment of intra‑group financing, historically one of the most common activities of inbound investors. Key challenges include: • equity‑at‑risk requirements for financing compa - nies; • demonstrating adequate substance, risk‑control functions and decision‑making in Luxembourg; • setting arm’s length interest rates, especially after updated guidance on shareholder and partner cur - rent accounts; and • meeting the operational expectations under the Circular LIR 56/1–56bis/1 of the Luxembourg tax authorities dated 27 December 2016 on financing activities. Consistent with OECD guidance and the transfer pric - ing circulars, Luxembourg requires that risk follows control. Problems common to inbound structures include:
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