Transfer Pricing Regulations in Luxembourg

Luxembourg is one of the first states that signed the OECD convention, and since 1961 has been a member of the convention. Currently, the Luxembourg’s transfer pricing framework is aligned in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022). Its domestic transfer pricing rules are provisioned in the Luxembourg Income Tax Law (LITL), which has been amended accordingly to adhere to the international standards.

Arm’s Length Principle

In Luxembourg, the arm’s length principle is stipulated in articles 56 and 56bis of the LITL, that ensure compliance with international as established in article 9 (Associated Enterprises) of the OECD Model Treaty.

Article 56 of LITL deals with transfer pricing rules for businesses that are connected through shared management, control, or ownership. If related businesses set terms for their transactions that wouldn’t be used between independent companies, the law requires their profits to be adjusted as if the transactions followed standard market conditions. These adjusted profits are then taxed to ensure fairness and compliance with market rules.

Article 56bis of LITL outlines how businesses must apply fair market pricing to transactions between related companies. It defines key terms like “controlled transaction” (a deal between related companies) and “arm’s length price” (the price that independent parties would agree on in similar circumstances). To ensure fair pricing, businesses must compare their related-party transactions with comparable independent transactions, considering factors like contractual terms, the functions performed, risks taken, and market conditions.

Related Party Definition

In Luxembourg, Article 56 of the Income Tax Law defines related parties for transfer pricing purposes. According to this article, a related-party relationship exists when:

• Direct or Indirect Participation: One enterprise has direct or indirect involvement in the management, control, or capital of another enterprise.
• Common Participation: Two enterprises are related when the same individuals or entities participate in the management, control, or capital of both companies.

This definition has been in place since January 1, 2015, when Luxembourg updated its laws to align with OECD guidelines. Before this change, the law applied a broader concept of related parties, based on what was called a “special economic relationship.” The update in 2015 brought Luxembourg’s rules in line with international standards, providing clearer and more consistent criteria for defining related parties in transfer pricing cases.

Transfer Pricing Methods

The methods that can be used to determine the arm’s length price are:

• Comparable uncontrolled price method
• Resale price method
• Cost plus method
• Transactional net margin method
• Profit split method

Luxembourg’s transfer pricing framework does not differentiate between the methods. Instead, it supports the application of the most appropriate method, and withing the meaning of paragraph 2.9 of the OECD Guidelines, “other methods” can be also considered.

Comparability Analysis

An important part of the transfer pricing compliance is the comparability analysis. In Luxembourg, comparing related-party transactions to those between independent businesses is a key part of ensuring fair pricing in transfer pricing. Factors assessed in the process include contracts, the roles and risks of each party, the type of goods or services involved, and the economic environment of the deal.

The Luxembourg Tax Administration has a slight a preference for internal comparables over foreign comparables when assessing financial transactions. In the absence of internal comparables, external databases, such as “AMADEUS” or “TP Catalyst” may be used for determining an arm’s-length price.

Documentation Requirements

Luxembourg does not currently mandate specific transfer pricing documentation like OECD BEPS Action 13 Master File and Local File. Taxpayers follow general tax provisions – Article § 171 (3) of the General Law on Taxation, and are encouraged to maintain documentation to support transfer prices for audits.

In the absence of specific transfer pricing documentation rules in Luxembourg, businesses are encouraged to follow the OECD Guidelines to ensure compliance. These suggest maintaining records on the group structure, including organizational charts, business operations, pricing, and strategies. Companies should document key activities, risks, and assets in Luxembourg, along with financial data for related entities. This documentation helps businesses stay prepared for audits and demonstrate compliance with transfer pricing rules.

Language Requirements: Documentation can be in French, German, or Luxembourgish. English is accepted, except in litigation cases where an official language is required.

It is important to note that in July 2024, the Luxembourg government introduced an amended draft of Bill 8186, which include a requirement for companies to prepare a Master File and Local File for transfer pricing documentation, in line with OECD standards. This requirement would apply to businesses with annual revenues exceeding €750 million. The approval of the draft is expected to take place during 2025.

Country-by-Country (CbC) Reporting:

Adhering to the guidance provided by the OECD, in Luxembourg a tax-resident entity must file a CbC report if it:

• is the ultimate parent entity of a multinational group, has a consolidated group revenue exceeding 750 million euros in the preceding fiscal year, and prepares consolidated financial statements; or
• would be required to consolidate its financial statements if its equity interests were traded on a public securities exchange.

Taxpayers falling in the scope of the CbC reporting requirement must notify the Luxembourg tax authorities that a report will be filed at least one year before the ultimate parent entity is required to file.

Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)

Luxembourg uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines. APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology.

Formally introduced since 2015, Luxembourg offers three types of APAs: Unilateral, Bilateral and Multilateral, which are governed by the Luxembourg tax authority – The Luxembourg Inland Revenue.

The most common type of APA in Luxembourg is unilateral, where the agreement is solely between the LTA and the taxpayer. These typically address the tax treatment of intra-group transactions involving Luxembourg entities. For unilateral APAs, a filing fee of up to €10,000 applies, which must be paid within one month after the LTA confirms the amount.

Bilateral APAs, on the other hand, involve agreements between the LTA, the taxpayer, and a foreign tax authority. These agreements are designed to align transfer pricing policies between two jurisdictions, offering certainty and reducing the risk of double taxation. Similarly, multilateral APAs expand this scope to include multiple foreign tax authorities, providing clarity for multinational enterprises with operations spanning several countries. However, both bilateral and multilateral APAs are less common in Luxembourg due to their complexity and the involvement of multiple parties.

MAPs are agreements made after an incident of double taxation has occurred. If a taxpayer believes that the taxation they are subject to, is inconsistent with the treaty, they can submit a request for an MAP. In line with BEPS Action 14, Luxembourg has integrated the MAP into its bilateral tax treaties to address instances where taxpayers face taxation not aligned with treaty provisions. Taxpayers can initiate a MAP request by submitting a detailed application to the Luxembourg tax authority.

Approach to Transfer Pricing Audits

Since 2020, the Luxembourg Tax Administration has significantly increased transfer pricing audits, particularly targeting intercompany financing transactions and compliance with the 2017 Transfer Pricing Circular. Two types of audits are conducted: light audits and in-depth audits.

• Light Audits: Focus on information requests, including transfer pricing documentation, benchmarking studies, and evidence of the Luxembourg entity’s substance (e.g., key decision-makers). If the provided information is adequate, no further follow-up is typically needed.
• In-Depth Audits: These involve detailed information requests, such as exports of accounting records, trial balances, agreements, board meeting minutes, bank statements, invoices, and accrued interest tables. Documentation must comply with Articles 56 and 56bis of the Luxembourg Income Tax Law and OECD Transfer Pricing Guidelines. The requested information is submitted via an encrypted system, usually within a strict 2–3-week deadline. Extensions are rare and more likely in early stages.

The audit process includes reviewing submitted data, interviews with key decision-makers to assess their knowledge of intercompany transactions, potential additional queries, and, in rare cases, site visits. The final phase is a report issued by the audit department, followed by independent assessment by the tax inspector before issuing any reassessment. Recent audits have taken over two years to conclude.

Penalties

Luxembourg does not have specific transfer pricing penalties, but general corporate tax penalties apply. Late corporate tax filings can incur a penalty of up to 10% of taxes due and a fine of up to €1,239.47 for failing to provide required information. Interest on late payments is charged at 0.6% per month, potentially reduced to 0.0%-0.2% if approved. Other penalties include €2,500 for tax irregularities, €25,000 for negligence, up to four times the taxes avoided for tax evasion, and fines of €1,239.47 to 10 times the taxes avoided for fraud. Reporting violations may lead to penalties of up to €250,000.

Taxation at a Glance

Luxembourg’s tax authority is called The Luxembourg Inland Revenue. The table below provides a summary of the main taxation rates related to businesses:

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