To make a long story short, note that transfer pricing provisions must be observed when preparing the Luxembourg VAT returns. Luxembourg taxpayers cannot remain indifferent to their performance, especially those belonging to multinational groups.
A new legal "dance floor" or landscape
As of 31 July 2018, the arm's length principle goes beyond a single statement. Before, there was only a reference to the arm's length principle under article 32 of the Luxembourg VAT Law regarding the exchange of goods/services without cash consideration as foreseen by article 31. As per law dated 6 August 2018 (applicable as of 31 July 2018) implementing the VAT group in Luxembourg, a new paragraph 3 is inserted in article 28 of the Luxembourg VAT Law.
Targeted "dances" or situations at a glance
The Luxembourg VAT Law has covered the same specific scenarios depicted by article 80 of the EU VAT Directive, as follows:
• Consideration received is below the open market value and the recipient has a limited input VAT recovery right in Luxembourg.
• Consideration received is below the open market value and the supplier has a limited input VAT recovery right, when the supply is exempt according to article 44 of the Luxembourg input VAT (i.e., exemptions not entitling to recover input VAT).
• Consideration paid exceeds the open market value and the supplier has limited input VAT recovery right.
Therefore, Luxembourg aligns with its neighboring countries. In fact, Belgium and Germany have already implemented such anti-avoidance rules but to a minor extent, i.e., they have not adopted the three situations described above.
By introducing this new rule, the Luxembourg legislator tries to avoid situations where a taxpayer artificially mitigates the amount of VAT as final cost or increases its input VAT recovery right. Arm's length principle should thus be tested when preparing the VAT returns.
These anti-avoidance provisions are quite recent but we expect that, as of 2019, the Luxembourg VAT authorities will start to monitor more closely the consideration agreed between related parties. For them, the good timing to perform the checks could be when carrying out a VAT audit or, likely as well, when checking cross-border transactions by using the VAT Information Exchange System (VIES).
In fact, it is a good opportunity to collect additional Luxembourg VAT and thus, mitigate the loss on the "electronic VAT revenue" (above one billion a few years ago).
Penalties for managers
Further to the latest tax reform on 1 January 2017, fines can amount up to EUR 25,000 per day depending on the level of infringement and last but not least, managers/directors can even be prosecuted and imprisoned if qualified as aggravated tax fraud or tax swindle!
Please remember that managers/directors of Luxembourg entities or foreign entities registered for VAT purposes in Luxembourg which are responsible for the day-to-day management of their companies are jointly and personally liable for the fulfilment of the VAT compliance obligations and/or the payment of VAT due of the entities managed. This is applicable in case of proved negligence ("inexécution fautive") of the manager/director.
In order to have a great show, we recommend to monitor transactions your company carries out with related parties in order to avoid adverse Luxembourg tax consequences.
Perhaps, it is the good timing to update obsolete TP documentation or request the TP study required by the Luxembourg tax authorities. Such documentation could now also be requested by the Luxembourg VAT authorities for investigation purposes.