LUXEMBOURG Law and Practice Contributed by: Oliver R. Hoor and Fanny Addouda, ATOZ Tax Advisers
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations Opening Comments Luxembourg has no integrated transfer pricing legisla - tion. Instead, according to different tax provisions and concepts applicable under Luxembourg domestic tax law, transfer pricing adjustments can be made in order to restate arm’s length conditions. Luxembourg Tax Law and Administrative Guidelines Article 56 of the Luxembourg Income Tax Law (LITL) Article 56 of the LITL formalises the application of the arm’s length principle under Luxembourg tax law in accordance with Article 9 of the OECD Model Tax Convention and provides a legal basis for transfer pricing adjustments (upward and downward adjust - ments) when associated enterprises deviate from the Article 56bis of the LITL formalises the authoritative nature of the OECD Transfer Pricing Guidelines. It pro - vides definitions of several terms that are relevant in a transfer pricing context (eg, the arm’s length princi - ple, controlled transaction, comparable uncontrolled transaction), as well as guiding principles in relation to the application of the arm’s length principle that closely follow some of the key paragraphs of Chapter I (arm’s length principle) of the OECD Transfer Pric - ing Guidelines. It clarifies that the arm’s length princi - ple has to be met whenever a Luxembourg company enters into a transaction with an affiliate. This requires calculation of the taxable income that may reason - ably be expected if the parties are dealing with one another at arm’s length. It does this by contrasting the choices made and the outcomes achieved by the taxpayer with those that would have resulted from market forces. Article 56bis of the LITL explicitly addresses transac - tions that may not be observed between independent enterprises. It provides that the fact that a specific transaction cannot be observed between independent enterprises does not mean that a transaction does not adhere to the arm’s length standard. This is a provi - arm’s length standard. Article 56bis of the LITL
sion of great importance as related parties may, in practice, enter into transactions that are not under - taken by independent enterprises. Article 56bis of the LITL introduces the concept of comparability analysis through the replication of some of the guidance pro - vided in the OECD Transfer Pricing Guidelines. Article 56bis of the LITL also deals with circumstances in which a transaction, as structured by a taxpayer, may be disregarded because there is a lack of valid com - mercial rationality, and a third party would not have entered into such a specific transaction. Nevertheless, the non-recognition of a transaction should only occur in very exceptional situations. Circular 56/1 – 56bis/1 of the Luxembourg tax authorities (LTA) on the tax treatment of intra- group financing activities The Circular of the LTA dated 27 December 2016 provides guidance on the practical application of the arm’s length principle to intra-group financing activi - ties. It also details some specific formal requirements applicable to financing companies when requesting an advanced pricing agreement (APA). Concepts of hidden dividend distributions and hidden capital contributions and their interaction with Article 56 of the LITL The concepts of hidden dividend distributions (Article 164 (3) of the LITL) and hidden capital contributions (Article 18 (1) of the LITL) also play an important role in ensuring that associated enterprises adhere to the arm’s length standard. According to Article 164 (3) of the LITL, hidden divi - dend distributions arise when a shareholder partner or interested party receives advantages directly or indirectly from a company that a third party would not have received. Article 164 (3) of the LITL states that such profit distributions have to be included in the company’s taxable income, meaning that they are not deductible for tax purposes and may be subject to withholding tax if no exemption applies. A hidden capital contribution refers to an advantage shifted by a shareholder to a company. While the con - cept is not defined in Luxembourg tax law, hidden capital contributions bear the following characteristics in accordance with the relevant case law:
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