OUR INSIGHTS AT A GLANCE
- As from tax year 2018, Luxembourg corporate taxpayers are required to indicate in their corporate tax returns whether they concluded transactions with related parties (within the meaning of article 56 Income Tax Law) which are located in so-called “non-cooperative jurisdictions”.
- The recently released 2017 corporate income tax form also introduces a new requirement to report certain transfer pricing related information including whether or not the company has engaged in transactions with related parties and if the company opted for the simpli cation measure stated in section 4 of the Circular of the Director of the tax administration L.I.R. 56/1- 56bis/1 of 27 December 2016.
- Should the taxpayer be unable to justify the arm’s length character of any reported intra-group transactions, the tax authorities may rely on the “hidden dividend distribution” concept or on article 56 of the Luxembourg Income Tax Law to perform tax adjustments.
- These developments show that transfer pricing documentation has become a key element in tax risk management and companies should consider or re-consider their strategy to re ect this new reality.
On 7 May 2018, the Luxembourg tax authorities released a circular introducing for Luxembourg corporate taxpayers some new reporting requirements on transactions concluded with related parties located in so-called “non-cooperative jurisdictions”. In addition, almost simultaneously, the Luxembourg tax authorities released the 2017 corporate income tax form which introduces a new requirement to report certain transfer pricing related information. In this article, we present the new reporting obligations applicable to Luxembourg corporate taxpayers.
Transactions with related parties located in so-called ‘‘non- cooperative jurisdictions’’
The Circular released by the Luxembourg tax authorities on 7 May 2018 provides that as from tax year 2018, Luxembourg corporate tax payers are required to indicate in their corporate tax returns whether they concluded transactions with related parties (within the meaning of article 56 Income Tax Law) which are located in so-called “non-cooperative jurisdictions”, as listed by the EU: http://www.consilium.europa.eu/fr/policies/eu- list-of-non-cooperative-jurisdictions/. The list of non-cooperative jurisdictions is updated on a regular basis and currently includes the following seven countries: American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago and US Virgin Islands.
This requirement follows the conclusions reached by the Council of the European Union in December 2017 according to which, to ensure coordinated action, Member States should apply administrative measures in the tax area reinforcing the monitoring of certain transactions and increased audit risks for taxpayers using structures or arrangements involving these jurisdictions.
The detail of all transactions concluded with these entities (type, amount, etc.) should be available in order to be provided to the tax authorities upon request.
The reporting is required as from tax year 2018.
New transfer pricing documentation requirements in 2017 corporate tax return
The recently released 2017 corporate tax return (Form 500 concerning corporate income tax, municipal business and net wealth tax return for Luxembourg resident companies) requires
Luxembourg corporate taxpayers to disclose the following transfer pricing information by means of answering the two following questions:
"Did the company engage into transactions with related parties (articles 56 and 56bis of the Luxembourg Income Tax Law (LITL))?"
The Luxembourg corporate taxpayer is supposed to answer positively each time that it has entered into an intercompany transaction of any type with a related party, no matter whether the transaction was cross-border or domestic. In practice, most Luxembourg companies are involved in intra-group transactions in one way or another.
While the tax return only requires a YES/NO answer, it can be expected that the Luxembourg tax authorities will request additional information on the transaction(s) each time the answer is positive.
The aim of the analysis of the information collected will be for the tax authorities to assess whether the transactions concluded by the Luxembourg company comply with the arm’s length principle according to which transactions within a group are comparedto similar transactions between unrelated entities to determine acceptable transfer prices.
If the Luxembourg tax authorities can prove that a transfer price is not within the range of arm’s length prices, there exists a rebuttable presumption that the transaction does not comply with the arm’s length principle, exerting pressure on taxpayers to produce transfer pricing documentation. Overall, the burden of proof for the non-arm’s length character of intra-group transactions should be relatively low.
Should the taxpayer be unable to justify the arm’s length character of intra-group transactions, the tax authorities may rely on the “hidden dividend distribution” concept or on article 56 of the Luxembourg Income Tax Law to perform tax adjustments.
"Did the company opt for the simpli cation measure stated in section 4 of the Circular of the Director of the tax administration L.I.R. 56/1 - 56bis/1 of 27 December 2016?"
This question relates to companies that on-lend funds, nanced by debt instruments, to associated enterprises. The circular provides a simpli cation measure for Luxembourg companies acting as mere intermediaries and on-lending funds received without bearing any signi cant risks.
Based on the simpli cation measure, transactions are deemed to comply with the arm’s length principle if the Luxembourg company realises a minimum return of 2% after tax on the amount of the nancing volume.
Taxpayers that want to apply the simpli cation measure must opt in on the relevant section of their corporate tax returns. Should a company opt in, a procedure for exchange of information will be launched based on the rules on administrative cooperation or in accordance with tax treaties.
In practice, Luxembourg companies that merely on-lend funds to other group companies, not taking any risks in relation to this activity, will hardly ever opt into this simpli cation measure given that the safe harbour remuneration is signi cantly higher than what might be expected at arm’s length for the functional and risk pro le of an intermediary.
Implications
While these new requirements follow an obligation introduced by the above-mentioned circular, it is an additional step towards an international trend for more comprehensive transfer pricing documentation.
Back in 2015, a new article 171(3) of the General Tax Code already extended the taxpayer’s duty of co-operation to transactions between associated enterprises. This new provision was merely there for clari cation purposes but nevertheless con rmed that the Luxembourg authorities were relying more heavily on transfer pricing documentation.
Transfer pricing documentation has become a key element in tax risk management in an environment that relies increasingly less on tax rulings and advance pricing agreements. With the tax-heightened international focus on transparency and scrutiny, companies would be wise to take it one step further, integrating the documentation of transfer prices in their wider tax strategy, using it as a means to re ect the business rationale behind their investment structure and intra-group transactions.
