Brexit And Asset Management: The Luxembourg Transfer Pricing Perspective

The asset management industry in the United Kingdom is the one of the biggest in the world, while Luxembourg is often cited as a key jurisdiction for asset management too, being the largest fund domicile in the EU.

At present, although the Brexit negotiations between the UK and EU seem to be at a standstill, many leading asset management firms are planning for relocation to a post-Brexit EU hub in Luxembourg. Specifically, current market intelligence indicates that 53 companies are planning to relocate from the UK to Luxembourg.

In this context, this article will discuss our thoughts on potential transfer pricing considerations from a Luxembourg standpoint.

Increased attention on transfer pricing

In the last few months, the Luxembourg Tax Authorities (LTA) have increased their focus on transfer pricing, particularly in relation to management companies (ManCos) established in Luxembourg. Some of the asset management players in Luxembourg have received requests from the LTA to provide local transfer pricing documentation reports supporting the transfer pricing positions of their Luxembourg operations.

Notably, in Luxembourg, the concept of transfer pricing is regulated by Article 56 and 56bis of the Luxembourg Income Tax Law and §171 of the Abgabenordnung, outlining that all transactions between a Luxembourg entity and group companies should correspond to arm's length market conditions which should then be documented and provided to the LTA upon request. Moreover, these regulations are complemented by circulars issued by the supervisory authority of the Luxembourg financial sector (the Commission de Surveillance du Secteur Financier, or CSSF) from time to time regarding different types of intra-group transactions and emphasizing the arm's length principle.

First actions to take

For firms, from a transfer pricing perspective, Brexit-related developments should be properly evaluated. One important action is to appropriately delineate the intercompany transaction (e.g. is it a transfer of business from the UK to Luxembourg or is it a reallocation of a business segment?), and then to price the transaction according to market conditions (e.g. if it's a transfer of business then exit fees may apply, or if increased functions are to be undertaken in Luxembourg then referral fees may apply).

In cases where transfer pricing policy already exists at the group level, an assessment can be undertaken to check its robustness and ensure its compliance with...