LUXEMBOURG Trends and Developments Contributed by: Peter Moons and Katerina Benioudaki, Loyens & Loeff
Although not stated in the New Circular, the arm’s length nature of intercompany transac - tions in general, and the terms and conditions of shareholder loans in particular, need to be properly substantiated and documented in line with the obligations laid down in the general tax On 20 December 2023, the Luxembourg Par - liament adopted the bill of law implementing the EU directive on global minimum taxation into domestic law ( “Pillar Two” ). On 19 Decem - ber 2024, the Luxembourg Parliament further approved the bill of law implementing into its domestic legislation additional elements of the 2023 and 2024 OECD guidance regarding Pillar Two rules. law and the income tax law. Transfer Pricing in Pillar Two According to Article 16, paragraph 4(1) of the law implementing Pillar Two into Luxembourg domestic law (the “Pillar Two Law” ), “[a]ny trans- actions between constituent entities located in different jurisdictions that are not recorded at the same amount in the financial statements of both constituent entities, or that do not comply with the arm’s length principle, are adjusted so that they are recorded at the same amount and comply with the arm’s length principle” , while Article 16, paragraph 4(3) of the Pillar Two Law states that “[f]or the purposes of this paragraph, ‘arm’s length principle’ means the principle that transactions between constituent entities should be recorded by reference to the terms that would have been obtained between independent enter- prises in comparable transactions and in compa- rable circumstances” . The aforementioned Article requires transac - tions between group entities to respect the arm’s length principle and to be recorded at the same price for all entities that are parties to the trans -
action. More precisely, Article 16 of the Pillar Two Law requires an adjustment to the financial accounting net income or loss to avoid double taxation or double non-taxation under the Global Anti-Base Erosion (GloBE) rules where the taxa - ble income of one or more group entities that are parties to a controlled transaction is determined using a transfer price different from the one used in the financial accounts. According to the OECD consolidated commentary to the GloBE Model Rules as published on 25 April 2024 (the “OECD Commentary” ), where the multinational enterprises (MNE) group has used the transfer price reflected in its financial accounts to com - pute local taxable income and the relevant tax authorities do not require a TP adjustment, this price should be used for the computation of GloBE income or loss. In such cases, the MNE should not make an adjustment under Article 16 of the Pillar Two Law. Although not explicitly stated in Article 16 of the Pillar Two Law, transactions between constitu - ent entities located in the same jurisdiction shall also be recorded at the same amount. This is the expected result from applying a common accounting standard to entities in the same jurisdiction. However, intra-group transactions between entities located in the same jurisdiction are often not required to be adjusted for tax pur - poses from the amounts used in the preparation of the consolidated financial statements as the shifting of income from one taxpayer to another within the same jurisdiction in principle does not impact the overall amount of income subject to tax in that jurisdiction. Notwithstanding the above, Article 16, para - graph 4(2) of the Pillar Two Law requires the application of the arm’s length principle to trans - actions between constituent entities located in the same jurisdiction if the sale or other transfer
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