With the Law of December 19th 2014, known as the "Package for the future", the Grand-Duchy of Luxembourg amended and updated its tax legislation with respect to transfer pricing. In particular, article 56 of the Luxembourg Income Tax Law ("LITL") has been amended and a new paragraph 171 section 3 has been introduced in the General Tax Law (Abgabenordnung, "AO"). With the adoption of these two legislative changes, Luxembourg has acknowledged the increasing importance of transfer pricing matters, as recently outlined by the OECD Base Erosion and Profit Shifting project.
The amended article 56 LITL explicitly refers to the arm's length principle to be applied between associated enterprises and contained in article 9 paragraph 1 of the OECD Model Tax Convention on Income and on Capital. The new legislation covers associated enterprises that are in a cross-border situation but also those that are in a purely domestic situation. In both cases, the profits of the associated enterprises are to be determined in accordance with conditions that unrelated parties would have agreed on and be taxed accordingly.
The newly introduced paragraph 171 section 3 AO extends the information, collaboration and documentation requirements of a taxpayer to transactions between associated enterprises. The tax authorities are entitled to request from the taxpayer general information about the transactions involving associated enterprises, and transfer pricing documentation detailing how the arm's length remuneration was determined. The goal of appropriate documentation is to justify that the income and expenses of the Luxembourg entities involved in intra-group transactions and declared in the tax return are comparable to similar transactions between unrelated parties.
"Both legislative changes in the transfer pricing area are applicable as from January 1st 2015."
If confirmation of the appropriateness of the transfer pricing remuneration, also known as the "margin", is sought with the Luxembourg tax authorities, the new procedure for tax rulings is also applicable to advance pricing agreements ("APAs").