Transfer Pricing In Luxembourg: What To Consider When Restructuring

Business restructurings are normally associated with a transfer of functions, risks, or assets between the entities of a group—and that means transfer pricing consequences. The restructured group entity is usually entitled to an (arm's-length) compensation, the assessment of which requires the use transfer pricing principles.1

These principles are elaborated on below, through examples in a Luxembourg context:

Inbound/outbound transfer of intangible property: In a number of cases, an existing intangible property (IP) held overseas is transferred to a Luxembourg company (LuxCo). The LuxCo then significantly improves the IP by additional research and development work in Luxembourg, benefiting from the Luxembourg IP regime (under Article 50ter LITL). In such cases, the transfer of the IP needs to be priced for Luxembourg purposes as the acquisition value will affect the "nexus ratio" computed for the application of the Luxembourg IP regime. The same principles would apply in the context of an outbound IP transfer from a Luxembourg entity to related parties. Inbound/outbound transfer of loan assets: In the wake of recent developments in Luxembourg and globally (ATAD, BEPS, and so on), some taxpayers may be reorganizing their business structures in an intra-group setting. This might involve the transfer of a loan or portfolio of loans at the LuxCo level. Taxpayers should pay attention to the fact that this needs to take place at market (arm's length) value. Inbound/outbound transfer of business: A transfer, termination, or renegotiation of a business arrangement may be regarded as an intercompany transaction and as such should be priced at arm's length. The first element would be to appropriately delineate the intercompany transaction, and then to price the transaction according to market conditions. From a Luxembourg transfer pricing perspective, there should be transfer pricing documentation supporting the arm's length character of the transaction (including citing the economic reasons of restructuring) and the pricing to be able to justify any charge incurred pursuant to the restructuring. When applying the arm's length principle to business restructurings, the fundamental question is whether a transfer of something of value has occurredsince an independent enterprise does not necessarily need to receive compensation when a change in its business arrangement results in a reduction of its income potential or expected future income. In the above...