As per 1 January 2015, Luxembourg codified (i) the Luxembourg advance tax ruling and advance pricing agreement (ATR/APA) practice and (ii) the arm's length principle (prior coverage: Luxembourg Budget 2015: corporate tax measures and Year End Tax Bulletin 2014). In addition, procedural rules in relation to the ATR/APA practice were laid down in a new Grand-Ducal decree dated 23 December 2014 (the Decree), also effective as per 1 January 2015.
The new framework for the ATR/APA practice
Prior to 1 January 2015, the basis of the Luxembourg ATR/APA practice was found in administrative circulars and general principles only. Luxembourg has now codified the ATR/APA practice by introducing a new article 29a in the General Tax Act (Abgabenordnung). Based on this new article, the competent tax inspector (préposé) has to decide on written requests filed by tax payers. It specifies that the decision to be issued by the tax inspector cannot result (by itself) in a tax exemption or reduction of tax and will only be valid for a maximum period of 5 years. The decision will bind the tax authorities with the exception if (i) the description of facts and circumstances is incorrect, (ii) the facts and circumstances have changed since the request was filed or if (iii) the decision is no longer in line with national, European Union or international law. Finally, for requests filed by enterprises, an administrative fee has been introduced in order to have the ATRs/APAs addressed. The fee will be payable by the applicant and will vary between EUR 3,000 and EUR 10,000, depending on the complexity of the request.
Procedural rules for the ATR/APA practice have been laid down in the Decree:
• Written requests can be filed both by enterprises and individuals and must be sent to the competent tax inspector (préposé) of the competent tax office, or, in case the competence cannot be determined, to the head of the tax directorate (directeur des contributions).
• Requests should at least include the following information:
1. A precise designation of the applicant (name, residence and fiscal number if any), of the parties and of other third-parties involved and a description of their respective activities;
2. A detailed description of the activities and/or contemplated activities which have not yet generated their effects;
3. A detailed analysis of legal issues, together with a detailed description of the legal position of the applicant relating thereto;
4. Confirmation that the request provides all relevant information and that the facts and circumstances as described in the request are accurate.
• Requests filed by corporations will be submitted by the tax inspector to an advisory body, the Commission des Décisions Anticipées (CDA).
• The decision on the request will be made by the competent tax inspector (the CDA will only advise the tax inspector to ensure a uniform and equal treatment of taxpayers).
• Upon receipt of the request, the level of the administrative fee for each request will be determined and will be payable by the applicant (also in case it involves multiple taxpayers) within one month after determination. No decision will be issued as long as the administrative fee has not been paid. The administrative fee will not be refunded if the request is withdrawn, is refused, or if the decision on the request is negative.
• The decisions made by the tax inspectors will be summarised and published on a no-names basis in the annual report of the tax authorities.
The Decree applies to pending requests filed before 2015, but these will not be subject to the administrative fee.
In the Decree it is mentioned that the activities for which the request is filed, should not yet have generated their effects. This implies that the request should be filed before implementation of the transaction, however, the application in practice of this rule is still unclear.
Furthermore, the Decree does not provide for a set timeframe within which the tax inspector will have to issue his decision.
Codification of the arm's length principle
The new article 56 of the Income Tax Act codifies the arm's length principle. Previously this principle was only implicitly reflected in the law through the mechanism for recognising hidden contributions/hidden distributions and applied, as such by the Luxembourg tax authorities. The codification should serve clarity in this respect.
The new article 56 provides that the profit derived by an entity from a transaction with a related entity should be determined on an at arm's length basis (i.e. as if both entities were independent). Related entities are defined as (i) an enterprise which participates directly or indirectly in the management, control or capital of another enterprise or (ii) enterprises which are connected because the same persons participate directly or indirectly in the management, control or capital of these enterprises.
The wording of the new article seems to imply that both upward and downward adjustments of the profits of the enterprises involved are possible.
The taxpayer will be required to have information and documentation available to support the terms and conditions applied to its intra-group transactions. If the tax authorities challenge these terms and conditions and the taxpayer does not comply with a request to provide this information, the burden of proof will shift from the tax authorities to the taxpayer.