New rules for Luxembourg companies intra-group financing

After the introduction of a new article in the Luxembourg tax code outlining the transfer pricing rules applicable to "controlled transactions", inspired in the OECD Transfer Pricing Guidelines, on December 27, 2106, Luxembourg tax authorities issued a circular letter defining new rules related to the tax treatment and more specifically the transfer pricing aspects of companies engaged in intra-group financing transactions.

The circular letter replaces circulars dated January 28th 2011 and April 8th 2011 on the same topic. A few of the changes introduced by the new rules are the following:
  • The rule regarding the equity at risk of at least 1% of the principal amount of the loans, or EUR 2,000,000, has been removed;
  • For simplification purposes, it is acceptable that the taxable result of the remuneration earned by a Luxembourg company acting as an intermediary be determined as a return on assets, when such remuneration is not supported by a transfer pricing report. 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.
  • In order to be considered to bear the risk related to financing activities, a Luxembourg entity engaging in these activities, besides having effective presence in Luxembourg, must have qualified personnel with the skills needed to control the risk related to the financing transactions.

Existing Advance Pricing Agreements ("APA") no longer bind the tax authorities as from January 1, 2017 (with a small grace period to adjust) for fiscal years subsequent to 2016.