LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
a modern, structured and assertive TP enforcement approach, particularly where: • TP documentation is weak; • financial transactions are not appropriately bench - marked; or • the functional profile does not align with the profits booked. In 2024, the tax authorities processed 122 mutual agreement procedure (MAP) or treaty‑based dis - pute requests, and closed 108 cases during the year. Although the tax authorities’ report does not specify how many involved transfer pricing, these figures show that MAP is actively and regularly used by Lux - embourg to resolve cross‑border tax disputes, includ - ing TP cases. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Compensating adjustments are allowed/made when a transfer pricing claim is settled, but only in limited circumstances, and only when they reflect the arm’s length principle. Luxembourg does not have a formal concept of “compensating adjustments” in domestic legislation. Neither Article 56 nor Article 56bis LITL explicitly provides for compensating adjustments, and none of the Luxembourg tax authorities’ materi - als obtained include a rule expressly authorising them. However, Luxembourg tax practice allows adjust - ments if and only if they ensure that the taxable result reflects arm’s length pricing, consistent with the OECD Transfer Pricing Guidelines, which have authoritative status under Article 56bis LITL. In cross-border situations, compensating adjustments made to avoid double taxation are most commonly handled via: • corresponding adjustments under Article 9 OECD model treaties; and • the MAP when necessary. These mechanisms are recognised in Luxembourg law and tax treaty practice.
When a foreign tax authority makes a unilateral upward adjustment to a taxpayer’s income, the taxpayer may request the opening of a MAP before the Luxembourg tax authorities, provided that either (i) the relevant tax treaty includes a MAP article, or (ii) the case falls within the scope of the EU Directive on tax dispute‑resolu - tion mechanisms (10 October 2017). Luxembourg has also issued a 2017 Circular outlining how MAP and other treaty‑based dispute‑resolution mechanisms are implemented. Importantly, Luxembourg is bound by the outcome of the MAP, even if domestic statute of limitation deadlines for tax assessment adjustments have already expired. Finally, the Luxembourg government has published a draft law creating a new procedure (Section 29c of the General Tax Law, or Abgabenordnung or AO) that allows taxpayers to request a bilateral or multi - lateral advance transfer pricing agreement based on Luxembourg’s double tax treaties. These advanced agreements would be concluded directly between the competent authorities of the states concerned through the MAP framework under Article 25 (3) of the OECD Model Tax Convention. 5.2 Local Branches and Local Subsidiaries In Luxembourg, local subsidiaries of non-local cor - porations are resident corporate taxpayers. Local branches of non-local corporations are treated the same as Luxembourg resident companies for CIT pur - poses. A branch is also subject to MBT if it conducts a commercial activity in the territory of Luxembourg. 5.3 Capital Gains of Non-Residents Non‑resident corporate entities are generally taxed in Luxembourg only on specific categories of Luxem - bourg‑source capital gains – namely gains from Lux - embourg immovable property and short‑term gains (within six months) on disposals of substantial partici - pations exceeding 10%. These rules also apply to liq - uidation proceeds and redemption payments treated as capital gains. Additionally, non‑resident capital gains tax may arise if the shareholder was a Luxembourg resident for over 15 years and became non‑resident less than five years before disposing of a Luxembourg participation.
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