New rules for intra-group financing

On December 27th 2016, the head of the Luxembourg tax authorities issued circular L.I.R. n° 56/1 – 56bis/1 relating to the tax treatment and more specifically the transfer pricing aspects of companies engaged in intra-group financing transactions (the “Circular”). The Circular was issued further to the introduction in the Luxembourg tax code of a new article which outlines the transfer pricing rules applicable to “controlled transactions” (“Article 56 bis LIR”). The provisions of Article 56 bis LIR are inspired by the OECD Transfer Pricing Guidelines and set out the methodology that must be applied to determine “arm’s length” prices.

With effect as from January 1st 2017, the Circular replaces the two previous circulars L.I.R. n° 164/2 dated January 28th 2011 and n°164/2bis dated April 8th 2011 on the same topic.

The main changes introduced by the Circular are the following:

  • The rule regarding the equity at risk (“capitaux propres adéquats”) of at least 1% of the principal amount of the loans, or EUR 2,000,000, has been removed;
  • Going forward, the equity at risk, for transfer pricing purposes, will have to be determined on the basis of the facts and circumstances specific to the intra-group financing transaction and credit analysis methods;
  • If the remuneration earned by a Luxembourg company that acts as an intermediary(i.e. it grants loans to group companies and is funded by group companies) is not supported by a transfer pricing report, it is acceptable, for simplification purposes, that the taxable result is determined as a return on assets. Currently, a minimum return of 2% after taxes is acceptable but this rate may be revised in the future by the tax authorities on the basis of relevant market analysis. Where this simplification rule is applied, the transaction will be subject to the automatic exchange of information;
  • With regard to the criteria of effective presence in Luxembourg (“présence réelle au Luxembourg”) and in order to be deemed to bear the risk related to its financing activities, the Luxembourg entity must have, in addition to the existing requirements (e.g. Luxembourg resident board members with the capacity to bind the company), qualified personnel which have the skills needed to control the risk related to the financing transactions.

Advance Pricing Agreements (“APA") issued on the basis of the rules applicable before the introduction of Article 56 bis LIR will no longer bind the tax authorities as from January 1st2017 for fiscal years subsequent to 2016. It is, of course, possible to request a new APA on the basis of the new transfer pricing rules.