TP audit guide

Transfer pricing dispute and resolution in Luxembourg: an overview from Philippe Neefs, Heike Weber and Sophie Boulanger of KPMG.

Market overview

Over the past few years, transfer pricing has become one of the hottest topics for taxpayers and advisers in Luxembourg.

Although the jurisdiction was relatively late in requiring transfer pricing documentation, it is now increasing its interest in transfer pricing in response to the international focus.

"The international environment is placing so much emphasis on transfer pricing. Obviously the OECD, EU commission and individual countries, and therefore also Luxembourg, are reacting to all these international developments. The Luxembourg tax authorities are not shy in asking for transfer pricing substantiation when reviewing tax returns," said Peter Moons, head of transfer pricing at Loyens & Loeff.

Although the market has somewhat recovered from LuxLeaks, taxpayers are more cautious in terms of advance pricing agreements (APAs) from Luxembourg. "LuxLeaks had created a lot of noise. Often it happened that journalists have given a wrong analysis to the advance agreements which can be found on the internet, for example by confusing gross turnover with net profit," said André Pesch, co-head of tax and transfer pricing at Baker & McKenzie. "It is mainly the bad image which some advance agreements have wrongfully received in the media which makes taxpayers now hesitant in seeking to obtain legal certainty and hence we notice a decrease of requests for advance tax agreements and advance pricing agreements."

One major result of the international emphasis has been increasingly aggressive revenue authorities around the world. This has also become apparent in Luxembourg, where the tax authorities have increased their staff resources and have been more reactive. The authorities remain quite cooperative however with tax advisers reporting the authorities in Luxembourg to not be aggressive, but simply doing their job in the interest of the country.

There has been a steady increase in TP litigation, while the environment relies increasingly less on tax rulings following the new rulings process. This, and BEPS, has resulted in clients seeking advice, particularly in regards to reviewing structures. Until recently, transfer pricing was high on clients' agendas, whereas this year, most taxpayers are careful to have compliant structures. "We see a lot more complexity in the question and in the discussion that we have with the client," said Raymond Krawczykowski, Deloitte's head of transfer pricing and tax.

As the focus on transfer pricing is growing, and expected to keep growing over the next years, documentation has become a key element in risk management. "Its role will only increase in coming years. In the current international tax environment of heightened transparency and scrutiny, companies would be wise to take it one step further and integrate the documentation of transfer prices in their wider tax strategy, using it as a means to reflect the business rationale behind their corporate structure and intra-group transactions," said Oliver R. Hoor, head of transfer pricing of ATOZ, Taxand Luxembourg.

As a result of the BEPS action plan, taxpayers need to develop a solid strategy in terms of transfer pricing and related documentation in order to mitigate tax risks, professionals reported. "The biggest lesson is that in transfer pricing reports, no shortcuts should be taken, but every assumption that is being made, every comparison that is suggested and every OECD method that is being applied, should simply be justified and the justification should be plausible," said Moons.

Luxembourg has already signalled the intention to implement country-by-country reporting (CbCR) in the near future, as the authorities are now relying more heavily on TP documentation to verify the arm's-length character of intragroup transactions.

"What you see is more a wait and see position, but with people thinking about plan B," said Pesch.

Tax authorities

Administration des Contributions Directes
45, Boulevard Roosevelt, L-2982, Luxembourg
Tel: +352 40 800 1
Fax: +352 40 800 2022

Tax rates at a glance

(As of April 2016)

Corporate income tax 21% (a)
Capital gains rate 21% (a)
Branch tax rate 21% (a)
Withholding tax
Dividends 0/15% (b)
Interest 0%/10%
Royalties 0%
Net operating losses (years)
Carryback 0
Carryforward Unlimited

  1. This is the maximum rate. A municipal business tax and an additional employment fund contribution (employment fund surcharge) are also levied on income. A new minimum tax regime is effective from January 1 2013.
  2. A 15% dividend withholding tax is imposed on payments to resident and non-residents. Under Luxembourg domestic law, a full withholding tax exemption applies to dividends if they are paid to qualifying entities established in EU/EEA member states, Switzerland or a country with which Luxembourg has entered into a double tax treaty and if certain conditions are met.

Source: EY 2016 Worldwide Corporate Tax Guide

Firm contact details

ATOZ Tax Advisers, Taxand Luxembourg
Deloitte Luxembourg
Loyens & Loeff