The provisions detailed in the Grand Ducal Decrees will enter into effect from the date of publication in the Official Gazette (Memorial) and will apply to requests introduced from that date.
Transfer pricing documentation — Master file and local file [see Draft grand-ducal regulation on mandatory transfer pricing documentation applicable to multinational enterprises]
The Bill introduces TP documentation requirements (i.e., all the documents that taxpayers are obliged to prepare to evidence that their related party transactions were performed under arm's length conditions and at arm's length prices) for transactions between associated enterprises. The draft grand-ducal regulation provides that, in accordance with the international standards resulting from the OECD BEPS Action 13 Report, this documentation consists of two files:
- The Local file : required from any Luxembourg tax resident entity which is a constituent entity of a multinational enterprises group within the meaning of the country by country reporting law1. The local file must therefore contain the transfer pricing analysis of transactions with other entities of the group. This file must include detailed information relating to the controlled transactions involving the constituent entity as well as financial information such as a description of the undertaken activities and the group strategy; a list of main competitors; a description of substantial controlled transactions; the amount of intragroup payments and income for each of the controlled transaction involving the constituent entity; the identification of the associated enterprise, etc..
- The Master file : required from any Luxembourg tax resident entity which is a constituent entity within the meaning of the country by country reporting law which has a net turnover in a financial year of at least EUR 100 million or a total balance sheet at closing date of at least EUR 400 million. The master file must therefore include information on the activities of the constituent entity's group such as a functional analysis describing the main contributions of the various entities to the group value creation, i.e., the key functions performed, the important risks incurred and the important assets used, a description of the important operations performed as well as the acquisitions and sales occurred during the financial period, information on intangible assets that may play a role in the determination of transfer prices, etc…
These new requirements should apply as from tax year 2024, i.e., to any financial year closing during calendar year 2024.
Bilateral or multilateral Advance Pricing Agreements [see Draft grand-ducal regulation implementing specific procedure for requesting a bi- lateral or multilateral APA]
The Bill provides for a new bilateral or multilateral agreement procedure on TP matters as provided under the double tax treaties concluded by Luxembourg. Any Advance Pricing Agreement (APA) request will be concluded between the competent authorities within the framework of the mutual agreement procedure set forth under Article 25 (3) of the OECD Model Tax Convention and its related commentaries. The Luxembourg tax authorities will set an administrative fee for processing the file payable within the month following the APA request, ranging between EUR 10,000 and EUR 20,000 depending on the complexity of the request and the volume of work. The draft grand ducal decree provides further details on this new procedure. It notably requires that the request is made in written and presented to the Director of the direct tax authorities or its delegate (Directeur de l'Administration des contributions directes). Further, the request must be motivated and contain at least the following information:
- The identification of the requestor (name, address, file number if any) as well as identification of all other companies concerned by the envisaged transaction.
- The detailed description of the envisaged transactions (as exhaustive as possible).
- The other jurisdiction(s) involved in the request.
- The tax years concerned.
- The transfer pricing study in line with OECD TP Guidelines including notably i) information about the group, previous financial statements, assets (tangibles and intangibles), income and functions of associated enterprises concerned; ii) the scope of the transactions under analysis; a description of the TP method used and the detailed information and analysis supporting the methodology, such as the pricing identification or the comparable margins and the range of expected results/outcome; iii) the critical hypothesis on which the methodology relies or even an analysis of the potential effect on the transactions and the related methodology in case of changes of the economic or/and operational conditions; iv) a general description of the market conditions; v) an analysis of all relevant tax issues that rise the proposed methodology; vi) any information that may have an impact on the current and proposed TP methodology as well as the corresponding data for the other States.
- The existing Luxembourg of foreign advance agreements in relation to the companies involved in the analysed transactions.
- A bona fide statement.
Once the request is complete, the Luxembourg competent authorities negotiate with the competent authorities of the other State until an agreement is reached. The Luxembourg competent authorities then communicate the APA to the competent tax office.
The new provisions should enter into effect from their date of publication in the Official Gazette and will apply to requests introduced from that date.
By issuing the Bill and the related Grand Ducal Decrees, Luxembourg is fully in line with international standards resulting from the OECD work notably Action 13 of the BEPS Action Plan. These latest developments confirm the growing interest and scrutiny from the Luxembourg tax authorities for transfer pricing matters.
Hence, we highly recommend to ensure all your transactions are properly documented from a transfer pricing perspective and that the documentation meet the requirements as set under the new provisions to mitigate any risk of challenges by the Luxembourg tax authorities.
For further information on what this development might mean for your organization and assistance to review and/or amend your internal procedures, please get in touch with your usual Baker McKenzie contact
1 law of 23 December 2016 implementing the directive EU 2016/881 dated 25 May 2016 amending directive 2011/16/EU