Thought leadership from ATOZ experts

Transfer pricing documentation in Luxembourg – What’s your strategy?

Transfer pricing has become the hot topic in Luxembourg taxation over the last few years in an environment that relies increasingly less on tax rulings. In the past, businesses viewed tax rulings as a way to provide certainty and avoid risks when structuring investments or intra-group transactions. However, for a number of reasons this is no longer the case.

This means that multinationals and international investors need to develop a solid strategy for transfer pricing and related documentation. In this blog, I would like to suggest some best practice recommendations which should help businesses define a reasonable approach towards transfer pricing.

In general, taxpayers are under a duty to co-operate with the Luxembourg tax authorities and to evidence facts and provide information in regard to statements made in the tax returns. In 2015, the taxpayer’ s duty of co-operation was extended to transactions between associated enterprises, although no specific transfer pricing documentation requirements were given. While the new provision is included merely for clarification purposes, it confirms that the Luxembourg authorities are now relying more heavily on transfer pricing documentation to verify the arm’s length character of intra-group transactions. In addition, Luxembourg has already signaled that it intends to implement Country-by-Country reporting rules.

Transfer pricing inevitably exerts pressure on taxpayers to find a balance between a comfortable level of security and the costs involved in the preparation of sound transfer pricing documentation. Accordingly, the question as to whether it is appropriate to prepare transfer pricing documentation also involves a cost/benefit-analysis.

In practice, Luxembourg companies should screen major intra-group transactions in order to identify issues that could raise suspicion on the part of the Luxembourg tax authorities and assess the magnitude of tax risks.

Where the Luxembourg tax authorities can reasonably evidence that the transfer pricing of a controlled transaction does not adhere to the arm’s length principle, it is for the taxpayer to provide counterarguments. In these circumstances, transfer pricing documentation is of immense value. Sound transfer pricing documentation may further be necessary in order to justify the value of a hidden capital contribution or a downward adjustment under article 56 of the LITL (Luxembourg Income Tax Law).

Notably, transfer prices may be reviewed several years after a transaction takes place. This makes it, from a practical perspective, increasingly difficult to trace back relevant facts and circumstances regarding the transaction, as well as data on comparable transactions. This puts pressure on Luxembourg companies to develop appropriate transfer pricing policies for risk mitigation purposes amid an international tax environment that elevates transparency in tax matters to a new level.

It is important that transfer pricing policies are not disregarded after their implementation. This includes that transfer pricing documentation should be regularly reviewed and updated to reflect the actual fact pattern; particularly upon business restructurings and where new transactions are envisaged.

Ultimately, transfer pricing documentation has become a key element in tax risk management. Its role will only increase in coming years. In the current international tax environment of heightened transparency and scrutiny, companies would be wise to take it one step further and integrate the documentation of transfer prices in their wider tax strategy, using it as a means to reflect the business rationale behind their corporate structure and intra-group transactions.

 Oliver R. Hoor
Oliver R. Hoor, Partner - Head of Transfer Pricing and the German Desk