LUXEMBOURG Law and Practice Contributed by: Oliver R. Hoor and Fanny Addouda, ATOZ Tax Advisers
further applies to both cross-border transactions and transactions between Luxembourg companies. Article 56 of the LITL defines “associated enterprise” in accordance with Article 9 (1) of the OECD Model Tax Convention, namely: • an enterprise that participates directly or indirectly in the management, control or capital of another enterprise; or • the same persons participate directly or indirectly in the management, control or capital of two enter - prises. Thus, Article 56 of the LITL includes a flexible defini - tion, which is not defined further (neither in the related parliamentary documents nor in the related Circular 56/1 – 56bis/1 of the LTA). The concepts of hidden dividend distributions and hidden capital contributions apply not only to share - holders but also to related parties of the shareholder. “Associated enterprise” is also defined in other provi - sions of Luxembourg tax law, such as the CFC Rules of Article 164ter of the LITL and the Anti-Hybrid Rules of Article 168ter of the LITL – some of which include more technical control criteria of 50% or 25%. 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods The Luxembourg transfer pricing provisions of Luxem - bourg tax law do not include any specific lists of trans - fer pricing methods that are to be applied. However, paragraph 6 of Article 56bis of the LITL defines gener - al principles that are to be followed depending on the transfer pricing method used. The method to be used to determine the appropriate comparable price must take into account identified comparability factors and must be consistent with the precisely defined nature of the transaction. The price identified by compar - ing the precisely defined transaction with compara - ble transactions on the open market will be the arm’s length price applicable to the transaction under analy - sis, in order to comply with the arm’s length principle.
The comparison method chosen must be the one that provides the best possible approximation of the arm’s length price. The parliamentary documents related to the draft law that introduced Article 56bis of the LITL state that par - agraph 6 of Article 56bis of LITL implements Chapters II and III of the OECD Transfer Pricing Guidelines into Luxembourg tax legislation. Chapters II and III set out the various techniques and methods to be used, with the transaction having been analysed in accordance with the instructions in Chapter I of the OECD Trans - fer Pricing Guidelines, in order to determine the arm’s length price. Thus, reference has to first be made to the five methods, as defined in the guidelines, which can be used to establish whether a controlled transac - tion adheres to the arm’s length standard. These are divided into two groups, namely the traditional trans - action methods and the transactional profit methods. However, in addition to these five methods, as stated in the commentary to the draft law introducing Article 56bis of the LITL, the OECD Transfer Pricing Guide - lines also allow any other method to be applied, as long as it enables a price to be set that satisfies the arm’s length principle. In such case, the taxpayer will have to evidence why this other method is the most appropriate method. 3.2 Unspecified Methods As a principle, the most appropriate method has to be applied, namely either one of the methods defined in the OECD Transfer Pricing Guidelines or any other method that enables a price to be established that is in line with the arm’s length principle. 3.3 Hierarchy of Methods Since the Luxembourg legislation only refers to the OECD Transfer Pricing Guidelines without specifying the different methods, the only principle that should be followed is that the most appropriate method should be applied, meaning there is no hierarchy of methods. In practice, the most commonly used method is the comparable uncontrolled price (CUP) method, mainly for a wide range of financial transactions and licence fees. However, other methods such as the cost-plus method (for low value-adding services) and the profit split method (eg, for highly integrated fund manage -
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