On 27 December 2016, the director of the Luxembourg direct tax administration (administration des contributions directes) issued a new circular n° 56/1 – 56bis/1 on the tax treatment of companies performing intragroup financing activities (the "New Circular"). It will replace the two existing circulars n° 164/2 of 28 January 2011 and n° 164/2bis of 8 April 2011 (collectively, the "Initial Circular"). The New Circular is to be read in combination with article 56 of the Luxembourg income tax law ("LITL"), applying the arm's length principle on transactions between related parties ("Controlled Transactions"), and new article 56bis LITL, on transfer pricing requirements.

The aim of the New Circular is twofold:

  • to enhance the Luxembourg legal framework on Controlled Transactions so as to be in line with international transfer pricing standards reflected by the provisions of article 9 of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention and in particular the OECD transfer pricing guidelines for multinational enterprises and tax administrations (the "OECD Transfer Pricing Guidelines"); and
  • to provide guidance on intragroup financing activities, notably on the comparability analysis to be conducted on Controlled Transactions.

Here the most important aspects of the New Circular:

When does the New Circular Apply?

Like the Initial Circular, the New Circular applies to entities that mainly conduct intragroup financing transactions. Intragroup financing transactions refer to any activity consisting of the granting of loans or fund advances remunerated by interests to related parties, refinanced by funds from public offerings, private loans, bank loans ... MORE

Comparability Analysis: How Does It Work?

Article 56bis LITL sets out the criteria needed to compare a Controlled Transaction to a transaction realised under the same conditions in the open market to ensure the arm's length character of the transaction ... MORE

What Does This Mean For Advance Pricing Requests ("APR")?

The New Circular extends the information to be provided to obtain an APR from the Luxembourg tax authorities in accordance with paragraph 29a of the Luxembourg general tax law and the grand-ducal regulation dated 23 December 2014 on the procedural aspects of such a request ... MORE

When Does the New Circular Enter Into Force?

The New Circular repealing the Initial Circular will enter into force on 1 January 2017. The provisions of the New Circular will then be applicable to ... MORE

Conclusion

The New Circular will strengthen the Luxembourg legal transfer pricing framework and by such means help to reinforce Luxembourg as a key jurisdiction for intragroup financing activities ... MORE