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Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

There is no specific procedure for the review of compliance with transfer pricing rules: the general procedure of the General Tax Law (Paragraphs 171(3) and 205) is applicable. On the basis of the principle that each party should be heard (adversarial principle), the tax authorities have to request further information on the transactions between related parties if the authorities consider that the arm’s-length principle included in the Luxembourg tax code is not respected. Taxpayers should collaborate with the tax authorities and provide them with the transfer pricing documentation. If needed, the tax administration should request further documentation or clarification. If, ultimately, the tax authorities consider that the information provided by the taxpayer does not demonstrate that the price of the transaction between related parties was at arm’s length, then the authorities will adjust the taxable profit/loss. The burden of proof lies with the taxpayer.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

There are no specific rules or procedures for the conduct of transfer pricing audits.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

Specific penalties related to transfer pricing non-compliance apply only for country-by-country reporting. The penalty for a resident constituent entity of an multinational group or for the reporting entity amounts to maximum €250,000.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

Transfer pricing adjustments by the Luxembourg tax authorities are based on Article 56 of the Luxembourg Income Tax Law: adjustments are made in order to achieve the profit that unrelated enterprises would realise.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

Once the tax assessments are issued, the standard procedure is applicable: the taxpayer will first have to file a claim with the head of the Inland Revenue. In case of a negative answer and in the absence of an answer after six months, the taxpayer can introduce a claim before the Lower Administrative Court. An appeal against the Lower Administrative Court decision must be made before the Higher Administrative Court.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

The mutual agreement procedure is available only when a double tax treaty has been signed with the other jurisdiction and a specific mutual agreement provision is included in the treaty. In August 2017 the Luxembourg tax authorities issued Circular LG–Conv DI 60 (www.impotsdirects.public.lu/content/dam/acd/fr/legislation/legi17/lg-convdi-60.pdf), which provides additional guidelines on the mutual agreement procedure. This procedure is available in three cases:

  • a disagreement between the tax administration and a taxpayer, who considers that the action of one or both of the contracting states results, or will result, in taxation for such taxpayer that is not in accordance with the provisions of the relevant double tax treaty;
  • difficulties or doubts arising as to the interpretation or application of a double tax treaty requiring a common action of the contracting states; and
  • a consultation between the contracting parties to eliminate double taxation in cases not covered in the double tax treaty.

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