LUXEMBOURG Law and Practice Contributed by: Oliver R. Hoor and Fanny Addouda, ATOZ Tax Advisers
of the OECD Transfer Pricing Guidelines, which were updated in order to reflect the outcome of Actions 8–10 of the BEPS Action Plan. 9.4 Impact of BEPS 2.0 Luxembourg has implemented the EU Pillar Two Directive by means of the Law of 22 December 2023, so the Pillar Two rules of the Directive are now in force in Luxembourg. As far as Pillar One is concerned, its impact will mainly depend on the scope of exclusions for the financial services industry. 9.5 Pillar One Amount B The OECD/G20 Inclusive Framework has finalised and published the consolidated Amount B guidance and incorporated it into the OECD Transfer Pricing Guide - lines – this framework remains optional for jurisdic - tions to adopt from fiscal years beginning on or after 1 January 2025. Luxembourg has not implemented Pillar One Amount B in its domestic legislation, nor introduced specific rules to apply it. Consistent with many EU peers, Luxembourg may forgo adoption in the near term. 9.6 Entities Bearing the Risk of Another Entity’s Operations A Luxembourg entity may bear the risk of another entity’s operations to the extent that the transaction is concluded under arm’s length conditions, providing the risk-bearing entity with an arm’s length remunera - tion. Explicit guarantees in financial transactions have to be remunerated in line with Chapter X of the OECD Transfer Pricing Guidelines. 9.7 Allocation of Profits to Permanent Establishments (PEs) In Luxembourg, the allocation of profits to PEs is gov - erned by the arm’s length principle as defined in Arti - cles 56/56bis of the LITL. These provisions treat a PE as a “functionally separate entity” requiring an analy - sis of the functions performed, assets used and risks assumed by the PE as if it were an independent enter - prise. Luxembourg’s framework is closely aligned with the Authorised OECD Approach (AOA). For tax trea - ties following the 2010 OECD Model (or later), Luxem - bourg recognises internal “dealings” (such as internal services or capital allocation) between the head office and the PE. For older treaties, the approach remains
grounded in the arm’s length principle but may be more restrictive regarding certain internal charges. Finally, there are no specific safe harbour rules in the LITL for PE profit allocation. 10. Relevance of the United Nations Practical Manual on Transfer Pricing 10.1 Impact of UN Practical Manual on Transfer Pricing While the UN Practical Manual on Transfer Pricing may be used as a source of information (reference is even made to it in the commentary to Draft Law No 6722 introducing Article 56 of the LITL), in practice, it is not relevant since Luxembourg closely follows the OECD Transfer Pricing Guidelines. 11. Safe Harbours or Other Unique Rules 11.1 Transfer Pricing Safe Harbours Luxembourg tax law does not include any transfer pricing-related safe harbours. However, as far as Lux - embourg companies performing intra-group financ - ing activities are concerned, Circular 56/1 – 56bis/1 provides for the following simplification measure for Luxembourg companies acting as mere intermediar - ies – ie, on-lending funds received without bearing any significant (credit) risks: transactions entered into by these companies are deemed to comply with the arm’s length principle if the analysed entity realises a minimum return of 2% after tax on the amount of the financing volume. In practice, this simplification measure is rarely applied as the 2% after-tax margin is significantly higher than the arm’s length remuneration for such activity that can be determined and applied on a case-by-case basis. Attention should be paid to the fact that arrange - ments involving the use of unilateral safe harbour rules belong to the specific arrangements concerning transfer pricing, which may have to be reported under the Luxembourg Law of 25 March 2020 implement - ing DAC6 regarding reportable cross-border arrange - ments. However, given that Circular 56/1 – 56bis/1 of the LTA on the tax treatment of intra-group financing
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