Luxembourg Tax Authorities Release New Guidelines For Intra-Group Financing Activities

On 27 December 2016, the Luxembourg tax authorities released a new circular (the Circular) on the tax treatment of intra-group financing activities. The Circular follows the introduction of the new article 56bis of the Income Tax Law (ITL) on the application of the arm's length principle.

The Circular provides guidance on the practical application of these principles to intra-group financing activities, ensuring consistency with recent Luxembourg legislative developments and all international transfer pricing standards.

The Circular cancels and replaces circular 164/2 of 28 January 2011 and circular 164/2bis of 8 April 2011 and becomes applicable as from 1 January 2017.

Scope of the Circular

The scope of the rules applicable to intra-group financing activities remains the same as under the old rules. The Circular applies to entities that are engaged in intra-group financing transactions. The term "intra-group financing transaction" is to be interpreted very broadly and includes any activity involving the granting of loans (or advancing of funds) to associated enterprises. How these loans are financed is irrelevant (for example, intra-group loans, bank loans, public issuances, etc.).

While the former circulars referred to cross-border financing transactions between associated enterprises, the new circular refers to any financing transaction between related enterprises, meaning that the remuneration of financing transactions between Luxembourg companies also has to be in line with the guidelines provided in the Circular. This change is in line with the Luxembourg transfer pricing rules, as amended in 2015 (article 56 ITL).

Determination of the arm's length price

The new article 56bis ITL emphasises the concept of the comparability analysis through the replication of some of the guidance provided in the OECD TP Guidelines. A comparability analysis is critical for the application of the arm's length principle and a cornerstone of any transfer pricing analysis.

While the comparability analysis was already an integral part of transfer pricing analysis, under the new regime there will be additional emphasis on the comparability analysis in transfer pricing documentation.

The Circular further expands on how to perform a comparability analysis in case of intra-group financing transactions.

Contractual terms

The contractual terms are always the starting point when analysing a controlled transaction. In accordance with OECD transfer pricing guidance, the Circular states that when the behaviour of...