LUXEMBOURG Law and Practice Contributed by: Oliver R Hoor and Fanny Addouda, ATOZ Tax Advisers
2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules The scope of Article 56 of the LITL is limited to transactions between associated enterprises and does not apply to transactions between individual shareholders and Luxembourg com - panies. Article 56 of the LITL further applies to both cross-border transactions and transactions between Luxembourg companies. Article 56 of the LITL defines “associated enter- prise” in accordance with Article 9 (1) of the OECD Model Tax Convention, namely: • an enterprise which participates directly or indirectly in the management, control, or capi - tal of another enterprise; or • the same persons participate directly or indi - rectly in the management, control or capital of two enterprises. Thus, Article 56 of the LITL includes a flexible definition, which is not defined further (neither in the related parliamentary documents, nor in the related Circular 56-56bis of the LTA). As far as the concepts of hidden dividend dis - tributions and hidden capital contributions are concerned, they apply not only to shareholders but also to related parties of the shareholder. “Associated enterprise” is also defined in other provisions 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, which, for some of them, include more techni - cal control criteria of 50% or 25% as the case may be).
3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods The Luxembourg transfer pricing provisions of Luxembourg tax law do not include any specific lists of transfer pricing methods to be applied. However, paragraph 6 of Article 56bis of the LITL defines general principles to be followed in respect of the transfer pricing method to be used: the methods to be used to determine the appropriate comparable price must take into account identified comparability factors and must be consistent with the nature of the transaction precisely defined. The price thus identified, by comparing the precisely defined transaction with comparable transactions on the open market, will be the arm’s length price appli - cable to the transaction under analysis, in order to comply with the arm’s length principle. The choice of comparison method must be the one that provides the best possible approximation of the arm’s length price. The parliamentary documents related to the draft law which introduced Article 56bis of the LITL state that paragraph 6 of Article 56bis of the Luxembourg income tax law (L.I.R.) implements Chapters II and III of the OECD Transfer Pric - ing Guidelines into Luxembourg tax legislation. Chapters II and III set out the various techniques and methods to be used, the transaction having been analysed in accordance with the instruc - tions in Chapter I of the OECD Transfer Pric - ing Guidelines, in order to determine the arm’s length price. Thus, reference first has to be made to the five methods, as defined in the guidelines, that can be used to establish whether a con - trolled transaction adheres to the arm’s length standard and which are divided into two groups, namely the traditional transaction methods and the transactional profit methods. However, in
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