Transfer Pricing Guidelines

On 28 January 2011, the Luxembourg direct tax authorities issued a circular (L.I.R n°164/2) (the "Circular"), which clarifies the tax treatment of Luxembourg companies that perform intra-group financing activities and sets out the framework for granting advance tax clearance concerning them. These guidelines are aimed at assisting the tax authorities and companies dealing with intra-group financing in determining their taxable basis in Luxembourg in accordance with OECD transfer pricing principles.

On 8 April 2011, the Luxembourg tax authorities issued an additional circular (L.I.R. n° 164/2 bis) (the "Additional Circular"), clarifying that existing advance tax agreements which fall within the scope of Circular will no longer be binding as of 1 January 2012 with regard to the remuneration of the intra-group financing activity. Taxpayers who wish to comply with the latest guidelines will have to file a new request with the Luxembourg competent tax authorities, covering the transfer pricing of the intra-group financing activity.

SCOPE

The Circular applies to all entities principally engaged in intra-group financing transactions. The activities related to the holding of participations are excluded from the scope of the Circular.

For the purpose of application of the Circular: "intra-group financing transactions refer to any activity consisting of granting loans or cash advances to related entities, refinanced by funds and financial instruments, such as public offerings, private loans, cash advances, or bank loans."

According to the Circular, two entities are related if one of them participates directly or indirectly in the management, control, or in the capital of the other entity; or, in the case where the same persons participate directly or indirectly in the management, control, or in the capital of these two entities.

In addition to the on-lending of funds, the Circular will only be applicable to the entities that are "principally" engaged in intra-group financing activity.

The circular does not clarify whether "principally" is based on the statutory annual accounts of the company or on any other criteria.

DETERMINATION OF THE ARM'S LENGTH REMUNERATION

The Circular refers to the application of the arm's length principle established in Article 9 of the OECD Model Tax Convention for the determination of the transfer price between related entities. The arm's-length principle states that transaction between two related parties must be...