The Luxembourg tax authorities will require a detailed transfer pricing analysis and strict substance requirements before issuing binding tax rulings in intra-group financing structures. Most of the requirements are more strict conditions for substance (even if often applied in our structures), capital requirements of at least 1% of granted loans or EUR 2,000,000 and requirement of an arm’s length remuneration. The circular also discusses to what extent the Luxembourg tax authorities will be bound and under what conditions.
The News: administrative circular LIR no. 164/2 dated 28 January 2011
In an administrative circular dated 28 January 2011, the Luxembourg tax authorities target the tax treatment of Luxembourg intra-group companies. Luxembourg is a popular location for conduit financing mechanisms. The circular deals with intra group lending activities financed by financial instruments in public or private offerings/financing or bank credit facilities.
The circular confirms that financing companies are required to be compensated with an arm’s length price that should be based on third-party transactions provided by credit institutions in comparable situations. All ruling requests will have to enclose a detailed and sound transfer pricing analysis.
The circular states that no ruling will be issued should a taxpayer fail to meet defined substance requirements. Beside the classical majority of Luxembourgish directors with the necessary professional qualifications and the fact that decisions of the company should be taken in Luxembourg, the circular requires the applicant to demonstrate that its capital is commensurate to the functions exercised, risks assumed and assets used. The circular pointed that, in principle, intra-group financing companies should be deemed to have an appropriate capital when it represents at least 1% of the nominal value of granted loans or EUR 2,000,000.
What are the impacts?
This circular is important, at least for four aspects:
- It formalizes substance requirements;
- It strengthens those substance requirements by requiring minimum capital level;
- It adds more formal transfer pricing considerations in intra-group financing operations using a Luxembourg vehicle;
- It publicly discusses the conditions for obtaining a binding ruling what was till now quite a private discussion with the competent tax inspector.
Those changes potentially affect existing structures that may turn to be at risk in case they do not follow those requirements; we would recommend a monitoring of the existing structures.