On 27 December 2016, the 2017 tax reform was published in the Official Gazette. As mentioned in our previous newsletter on this topic, in terms of tax impact for international investors, one of the main changes is the introduction of a new article into Luxembourg income tax law (LITL), Article 56bis LITL which deals with methodologies to apply when pricing intragroup financing transactions.
In addition, the Luxembourg tax authorities (LTA) issued a new circular, Circular n°56/1 - 56bis/1 of 27 December 2016 (the Circular), which provides further transfer pricing guidance.
The Circular gives a reminder of the current general context, i.e. what the existing legal requirements and OECD recommendations are. It further explains that Article 56bis LITL, which will be applicable as from 1 January 2017, sets a frame of detailed principles to be followed when doing a transfer pricing analysis (with regard to the comparability, risks and functions analysis).
The pricing should be carried out via a comparability analysis (based on the identification of the financial and commercial relationships between associated enterprises, on the determination of conditions and circumstances economically relevant and on contractual dispositions) and an analysis of the risks and functions related to the transaction (analysing the creation and the management of the transaction, as well as the risks in the financial relationships). The economically relevant conditions and circumstances of the accurately outlined controlled transaction must be considered in light of comparable transactions on the open market, and transactions lacking commercial rationality must be set aside.
Where specific conditions are met, the Circular includes a simplification measure for companies with a pure intragroup intermediary financing activity: for simplification purposes, transactions will be considered as in line with the arm's length principle if, in relation to the controlled transactions analysed, the company generates a minimum return (considering the assets financed) of 2 percent1 after tax.
The Circular indicates that existing advance pricing agreements will no longer be binding for the LTA as from fiscal year 2017 and clarifies the information which now needs to be communicated for a taxpayer to obtain an advance pricing agreement from the Luxembourg tax authorities.
Article 56bis LITL will be applicable as soon as 1 January 2017, which means taxpayers involved in intragroup financing activities need to proceed with the analysis of each situation on a case-by-case basis, in order to comply with the new legislative framework. Such an analysis is required even in situations where the intragroup financing activity is covered by an advance pricing agreement, which was supposed to stay valid beyond 1 January 2017. We expect to gain further knowledge on how to interpret the different points over the coming weeks.