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Luxembourg: Budget proposals, arm’s length principle, transfer pricing analysis

Luxembourg: Budget proposals

The Luxembourg government has presented to parliament, a draft law for the 2017 budget that includes a proposal to transpose into Luxembourg tax law, rules for applying the arm’s length principle from 2017 onwards—following the 2011 transfer pricing circular for intra-group financing and the 2015 legal framework for transfer pricing adjustments and documentation.


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Comparatibility analysis

As proposed, Article 56bis of Luxembourg’s income tax law would establish a legal framework for “comparability analysis.” With this new Article 56bis, the arm’s length principle would be required in the context of a broader value chain analysis. The draft law would also require that a transfer pricing analysis be performed by taxpayers for each and every controlled transaction. However, if the comparability analysis were to reveal that the same transaction would not be entered into by independent parties, this fact alone would not necessarily mean that the controlled transaction does not have the characteristics of an arm’s length arrangement. 

The draft law states that a transfer pricing analysis is to be based on a comparison of the conditions in a controlled transaction, with the conditions that would have been made had the parties been independent and undertaking a comparable transaction under comparable circumstances. Two key aspects for the comparability analysis would be:

  • To identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances attaching to those relations so that the controlled transaction is accurately delineated
  • To compare the conditions and the economically relevant circumstances of the controlled transaction as accurately delineated with the conditions and the economically relevant circumstances of comparable transactions between independent parties

According to the draft law, the comparability factors that would need to be identified can be broadly categorised as follows:

  • The contractual terms of the transaction
  • The functions performed by each of the parties to the transaction, taking into account assets used and risks assumed and managed
  • The characteristics of the property transferred, the services provided or the agreement concluded
  • The economic circumstances of the parties and of the market in which the parties operate
  • The business strategies pursued by the parties

The transfer pricing methods would need to take into account the identified comparability factors and would need to be consistent with the actual nature of the accurately delineated transaction. The draft law imposes the obligation on the taxpayer to determine the most appropriate transfer pricing method that allows for the closest approximation to an arm’s length price.

Accurately delineated transactions between the parties could be disregarded for transfer pricing purposes, if part of the transaction does not possess the commercial rationality of arrangements that would be agreed between independent parties under comparable economic circumstances (non-recognition).


Read an October 2016 report prepared by the KPMG member firm in Luxembourg

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