LUXEMBOURG Law and Practice Contributed by: Oliver R Hoor and Fanny Addouda, ATOZ Tax Advisers
documentation needs to be available and updat - ed on an annual basis. Luxembourg Double Tax Treaty Network Almost all Luxembourg double tax treaties are based on the OECD Model Tax convention and thus include the arm’s length principle, as further defined in the OECD Transfer Pricing Guidelines. OECD Transfer Pricing Guidelines As a member of the OECD, Luxembourg adheres to the organisation’s Transfer Pricing Guidelines which reflect the consensus of OECD member countries towards the application of the arm’s length principle, as provided in Article 9 (1) of the OECD Model Tax Convention. Since the Luxembourg legislation does not provide for any integrated transfer pricing legislation, the OECD Transfer Pricing Guidelines play an extremely important role for Luxembourg taxpayers, when analysing their transactions from a transfer pric - ing point of view. Reference to these guidelines is made in both the parliamentary documents (such as the ones related to the draft laws intro - ducing Article 56 and Article 56bis of the LITL) and in Circular 56/1 – 56bis/1 of the LTA on the tax treatment of intra-group financing activities. 1.2 Current Regime and Recent Changes Over the past few years, transfer pricing and the need for related documentation have become increasingly important in Luxembourg. Before 2011, Luxembourg domestic tax law did not provide any specific transfer pricing rules or documentation requirements. On 28 January 2011, the LTA issued the first circular dealing with transfer pricing, Circular 164/2, which pro - vided guidance on how Luxembourg companies performing financing activities should determine their arm’s length margin. This circular already explicitly referred to the OECD Transfer Pricing Guidelines.
The Law of 19 December 2014 amended Article 56 of the LITL in order to formalise the applica - tion of the arm’s length principle and provided a legal basis for transfer pricing adjustments when associated enterprises do not meet the arm’s length standard. The same law also amended paragraph 171 of the LGTL in order to explicitly extend the duty of co-operation of taxpayers to transactions between associated enterprises, reflecting the increasing importance of transfer pricing documentation. The Law of 23 December 2016 introduced Arti - cle 56bis of the LITL which provided, for the first time, definitions and guiding principles in relation to the application of the arm’s length principle. These definitions and guiding principles are in line with the OECD Transfer Pricing Guidelines. In order to reflect the changes introduced by Article 56bis of the LITL, on 27 December 2016, the LTA released a new circular, Circular 56/1 – 56bis/1, on the tax treatment of intra-group financing activities, which provides guidance on the practical application of the arm’s length principle to intra-group financing activities and repealed and replaced the former Circular of 28 January 2011 with effect from 1 January 2017. Further changes are in the pipeline with draft law No 8186, presented to Parliament on 28 March 2023, which would introduce a new procedure for requesting an advanced bilateral or multilat - eral agreement on transfer pricing pursuant to the double tax treaties concluded by Luxem - bourg and additional transfer pricing documen - tation requirements (master file and local file, in line with Action 13 of the Base Erosion and Profit Shifting (BEPS) Action Plan).
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