LUXEMBOURG Law and Practice Contributed by: Oliver R Hoor and Fanny Addouda, ATOZ Tax Advisers
ity analysis through a replication of some of the guidance provided 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 commercial rationality, and a third party would not have entered into 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 appli - cation of the arm’s length principle to intra-group financing activities. It also details some specific formal requirements applicable to financing companies when requesting an 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 dividend 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 advan - tage shifted by a shareholder to a company. While the concept is not defined in Luxembourg tax law, hidden capital contributions bear the following characteristics in accordance with the relevant case law: • a shareholder or a related party of the share - holder; • grants, motivated by the shareholding rela - tionship; and • 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 compensation), and the con - tribution is not a regular contribution (pursu - ant 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 directly relate to balance sheet items, namely an increase in assets or a decrease in liabilities. In contrast, any advantage (includ - ing 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 contri - butions operate independently of one another and may apply concurrently. In case of an over - lap, 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 consequence
234 CHAMBERS.COM
Powered by FlippingBook