Transfer pricing: new requirements in 2017 tax returns

The Luxembourg Tax Authorities (“LTA”) inserted in Form 500 “Corporate income tax, municipal business and net worth tax return for resident corporations” for the tax return 2017 the following new disclosure requirements:

1. Is the company is engaged in transactions with related parties (article 56 and 56bis Luxembourg Income Tax Law “LITL”)?
2. Has the company opted for the simplification measure stated in section 4 of the Circular of the Director of the tax administration LITL 56/1 – 56bis/1 as of December 27, 2016 (“Circular”)?

1. In Luxembourg, pursuant to Article 56 of LITL, two enterprises are considered related parties where one of them participates directly or indirectly in the management, control or capital of the other or if the same persons participate directly or indirectly in the management, control or capital of both enterprises. Covered transactions would be (non-exhaustive list):
   • ­Intra-group loans;
   • ­Management and advisory services;
   • ­Dealings with permanent establishments;
   • ­IP transactions (licensing agreement, transfer of assets, etc).
   In this respect, the taxpayer should be able to justify the transfer prices used in the framework of a controlled transaction in its tax returns. This obligation should also be understood in the context of the recently adopted Circular LG – A no. 64 on relating to the defensive measures in relation to the EU list of non-cooperative jurisdictions for tax purposes (for more information, please refer to the e-alert “Additional transparency obligations for Luxembourg taxpayers: defensive measures in relation to the EU list of non-cooperative jurisdictions” of 30 May 2018), illustrating an increase of transparency/reporting obligations for Luxembourg taxpayers.
2. As a reminder, the Circular provides guidance in terms of substance and transfer pricing requirements in line with the Organisation for Economic Co-operation and Development (“OECD”) guidelines. In a nutshell, the Circular presented the obligations that companies involved in intra-group financing activity have to comply with, i.e. adequate level of equity at-risk, arm’s length remuneration, preparation of transfer pricing, substance requirements, etc.

However the Circular also offered a simplification measure, whereby a Luxembourg company would be able to determine its remuneration for intra-group services based on a pre-determined rate.

Indeed for a group finance company acting as a pure intermediary, it is accepted for the purposes of simplicity to assume that the transaction respects the arm’s length principle when the company derives from the controlled transaction a minimum after tax return of 2% on the financed assets.

The Circular indicates that the LTA would review this minimum percentage on the basis of relevant market analysis.

Moreover, taxpayers opting for the simplification measure are in principle subject to the exchanges of information provided for in the framework of (i) the law of 29 March 2013 as amended, on administrative cooperation in the field of taxation, (ii) tax treaties to prevent double taxation, and (iii) the law of 26 May 2014 approving the Multilateral Convention on Mutual Administrative Assistance in tax matters.

It should be noted that the LTA added these two above-mentioned information requirements as of FY 2017 and the taxpayers should be more diligent on the transfer pricing position of their companies if such issue arises in a transaction with related parties.