New rules on granting rulings and change to transfer pricing provisions

A bill of law (reference number 6722) (the "Bill") was lodged with the Luxembourg Parliament on 16 October 2014, referred as the "package for the future", which includes two significant tax changes, relating to:

- Clarification of the legal frame for the granting of tax rulings in Luxembourg, and

- Amendment of Luxembourg transfer pricing regulations.

The Bill introduces a formal procedure for tax rulings. Under the new provisions, upon written request, the head of the competent tax office ("préposé du bureau d'imposition") shall issue a tax confirmation related to one or several operations contemplated by the taxpayer, and this confirmation shall bind the tax authorities. The objective of the confirmation is to ensure a uniform interpretation of tax laws for the taxpayers as well as legal security. The Bill further specifies that the practicalities are to be detailed in a Grand Ducal decree, for which no draft has yet been published. It is worth noting that the treatment of tax ruling may be subject to the payment of an administrative fee. The practicalities of the ruling practice are to be detailed in a Grand Ducal decree, for which no draft has yet been published.

The Bill also includes a change to the existing provision on profit adjustments between associated enterprises (Article 56 of the income tax Law). It is planned to fully replace the existing provision by a wording very similar to the first paragraph of Article 9 of the OECD model tax Convention (dealing with profit adjustments between associated enterprises). Furthermore, the new provisions on the ruling practice confirm that a binding ruling can be granted on transfer pricing issues.

Under the new transfer pricing provisions, transactions between two associated enterprises shall comply with arm's length principles, otherwise the taxation will be adjusted to arm's length conditions. Enterprises are deemed associated if:

- One enterprise takes part directly or indirectly in the management, control or capital of another enterprise; or
- The same persons are directly or indirectly involved in the management control or capital of the two enterprises.

The wording is therefore exactly the same as that of Article 9 of the OECD tax model Convention.