LUXEMBOURG Law and Practice Contributed by: Oliver R. Hoor and Fanny Addouda, ATOZ Tax Advisers
• a shareholder or a related party of the shareholder; • grants motivated by the shareholding relationship; • an advantage to a company that may be reflected in the balance sheet – ie, either an increase in assets or a decrease in liabilities (insofar as the shareholder does not receive an arm’s length com - pensation); and • the contribution is not a regular contribution (pur - suant to Luxembourg commercial law). In principle, contributions increase the net equity in the receiving company’s balance sheet. The object of a hidden capital contribution should therefore direct - ly relate to balance sheet items, namely an increase in assets or a decrease in liabilities. In contrast, any advantage (including free services) shifted by the company to its shareholder(s) should be classified as a hidden dividend distribution. Consequently, the scope of hidden capital contributions and that of hid - den dividend distributions do not mirror each other, though both concepts share the same objective, namely the separation of the realm of the company from its shareholders. Article 56 of the LITL and the concepts of hidden dividend distributions and hidden capital contribu - tions operate independently of one another and may apply concurrently. In case of an overlap, however, the concepts of hidden dividend distributions and hidden capital contributions should take precedence over Article 56 of the LITL. This is because the only tax con - sequence of Article 56 of the LITL is an adjustment of the taxable income of the company (in order to restate arm’s length conditions), whereas the concepts of hid - den dividend distributions and hidden capital contri - butions may require additional tax adjustments at the level of the company and the shareholder. Since the introduction of Section 3 of paragraph 171 of the Luxembourg General Tax Law (LGTL), the duty of co-operation of taxpayers set out in paragraph 1 thereof has been expressly extended to transactions between associated enterprises. This means that transfer pricing documentation is identified in the Lux - embourg tax law as information that taxpayers should Transfer pricing documentation Duty of co-operation of taxpayers
provide to the LTA upon request in order to support the positions they take in their tax returns. Country-by-country (CbC) reporting The Law of 23 December 2016 implemented the pro - visions of Council Directive (EU) 2016/881 of 25 May 2016 into Luxembourg law, which extended adminis - trative co-operation in tax matters to CbC reporting. Multinational enterprise (MNE) groups with a consoli - dated revenue exceeding EUR750 million are required to prepare a CbC report. The entity of the group in charge of the reporting is either the Luxembourg resi - dent ultimate parent entity of the MNE group or, in certain circumstances, any other reporting entity – a Luxembourg subsidiary or a Luxembourg permanent establishment (PE) – as defined in Annex 2 of the law. The CbC report follows the OECD recommendations provided in Chapter V of the OECD Transfer Pricing Guidelines. Article 164ter of the LITL – transfer pricing aspects of the Controlled Foreign Company (CFC) Rules Article 164ter of the LITL, which implemented the CFC Rules of the Council Directive (EU) 2016/1164 into Luxembourg tax law with effect as from 1 Janu - ary 2019, includes some transfer pricing-related aspects. This is because Luxembourg is one of the few EU member states that opted for the transac - tional approach when introducing the CFC rules. Arti - cle 164ter of the LITL provides that a Luxembourg corporate taxpayer or a Luxembourg PE of a non- Luxembourg tax resident entity will be taxed on the non-distributed income of an entity or PE that qualifies as a CFC, provided that the non-distributed income arises from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage. An arrangement or a series thereof will be regarded as non-genuine if the entity or PE does not own the assets or has not undertaken the risks that generated all or part of its income if it were not controlled by a Luxembourg corporate taxpayer when the significant people functions, which are relevant to those assets and risks, are carried out and are instru - mental in generating the CFC’s income, were carried out. While no further clarification is provided on the concept of significant people functions and the inter - action between the Luxembourg transfer pricing rules and the CFC Rules, in Circular 164ter/1 of 17 June
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