Over
the last decades, Luxembourg has developed and cemented its position as
a prime holding location and a major financial centre within Europe.
Multinational enterprises and international investors alike use
Luxembourg as a platform to manage their business activities and
investments.
Luxembourg
companies may enter into diverse commercial and financial transactions
with associated enterprises. The prices charged in regard to these
controlled transactions are called transfer prices. For Luxembourg tax
purposes, these prices have to adhere to the “arm’s length principle”.
The
arm’s length principle is the international transfer pricing standard
that OECD member countries have agreed should be used for tax purposes
by MNE groups and tax administrations. The arm`s length principle
requires that the consideration for any transaction between related
parties conform to the level that would have been agreed if the
transaction were to have taken place between unrelated parties under
comparable circumstances.
The
arm’s length principle is firmly ingrained in Luxembourg tax law and
has been explicitly stated in article 56 of the Luxembourg Income Tax
Law (LITL). In addition, several concepts and provisions under
Luxembourg tax law require the arm’s length standard to be respected by
Luxembourg companies.
As
a member of the OECD, Luxembourg adheres to the organization’s Transfer
Pricing Guidelines which reflect the consensus of OECD Member
countries towards the application of the arm’s length principle as
provided in article 9(1) of the OECD Model Tax Convention. Notably, this
provision is frequently included in tax treaties concluded by
Luxembourg.
Transfer
pricing and the OECD Transfer Pricing Guidelines received a lot of
attention during the OECD/G20 in their Base Erosion and Profit Shifting
(BEPS) initiative. 4 of the 15 BEPS Actions aimed at providing new or
changing existing transfer pricing guidance and related documentation
requirements. As a result thereof, several chapters of the OECD
Guidelines have been significantly amended or replaced in the 2017
Revision thereof.
In
2020, a new chapter X has been added to the OECD Transfer Pricing
Guidelines that provides guidance on transfer pricing aspects of
financial transactions which are a common phenomenon in Luxembourg.
On
18 December 2020, the OECD further provided guidance on the application
of the arm’s length principle and the OECD Transfer Pricing Guidelines
to issues that may arise or be exacerbated in the context of the
so-called COVID-19 pandemic and the financial turmoil resulting from
government responses thereto.
This
book analyses all facets of Luxembourg transfer pricing rules and
relevant guidance in the 2020 version of the OECD Guidelines. As such,
it should enable readers to develop a sound understanding of transfer
pricing in Luxembourg.