LUXEMBOURG Law and Practice Contributed by: Oliver R Hoor and Fanny Addouda, ATOZ Tax Advisers
11. Safe Harbours or Other Unique Rules 11.1 Transfer Pricing Safe Harbours Luxembourg tax law does not include any trans - fer pricing related safe harbours. However, as far as Luxembourg companies performing intra- group financing activities are concerned, Circu - lar 56/1 – 56bis/1 provides for the following sim - plification measure for Luxembourg companies acting as mere intermediaries – ie, on-lending funds received without bearing any significant risks: transactions entered into by these com - panies 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 simplifica - tion measure is never applied as the 2% after- tax margin is significantly higher than the arm’s length remuneration for such activity. Attention should be paid to the fact that arrange - ments involving the use of unilateral safe harbour rules belong to the specific arrangements con - cerning transfer pricing which may have to be reported under the Luxembourg Law of 25 March 2020 implementing DAC6 regarding reportable cross-border arrangements. However, given that Circular 56/1 – 56bis/1 of the LTA on the tax treatment of intra-group financing activities states that companies which opt for the simpli - fication measure that may apply to Luxembourg companies acting as mere intermediaries will already be subject to spontaneous exchanges of information, reporting under DAC6 in this specific situation would mean that the informa - tion would be exchanged twice (once under the spontaneous information exchange and once under the automatic exchange of DAC6).
LITL closely follows some of the key paragraphs of Chapter I (arm’s length principle) 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 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 trans - action is concluded under arm’s length condi - tions providing the risk-bearing entity with an arm’s length remuneration. Explicit guarantees in financial transactions have to be remunerated in line with Chapter X of the OECD Transfer Pric - ing Guidelines. 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 Pric - ing may be used as a source of information (ref - erence 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 Luxem - bourg closely follows the OECD Transfer Pricing Guidelines.
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