LUXEMBOURG Law and Practice Contributed by: Oliver R Hoor and Fanny Addouda, ATOZ Tax Advisers
ATOZ Tax Advisers 1B, Heienhaff L-1736 Senningerberg Luxembourg Tel: +352 26 940 Fax: +352 26 940 300
Email: info@atoz.lu Web: www.atoz.lu
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations Opening Comments Luxembourg tax legislation does not provide for any integrated transfer pricing legislation. 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 adjustments) when associated enter - prises deviate from the arm’s length standard. Article 56bis of the LITL Article 56bis of the LITL formalises the authorita - tive nature of the OECD Transfer Pricing Guide - lines. It provides definitions of several terms that
are relevant in a transfer pricing context (eg, controlled transaction, comparable uncontrolled transaction, arm’s length price) and guiding prin - ciples in relation to the application of the arm’s length principle which closely follow some of the key paragraphs of Chapter I (arm’s length princi - ple) of the OECD Transfer Pricing Guidelines. It clarifies that the arm’s length principle has to be met whenever a Luxembourg company enters into a controlled transaction with an affiliate. This requires a calculation of the taxable income that may reasonably 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 explicitly addresses transactions that may not be observed between independent enterprises. It provides that the fact that a spe - cific 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 provision of great impor - tance as related parties may, in practice, enter into transactions that are not undertaken by independent enterprises. Article 56bis of the LITL introduces the concept of the comparabil -
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