Luxembourg introduced new intra-group financing rules on 1 January 2017. While industry players have been caught off guard, they’re now analysing the new transfer pricing rules and how to implement them. Watch the interview of Loek de Preter, PwC Luxembourg Transfer Pricing Leader, commenting on how the market reacted and how to comply.
Intra-group financing: Don’t be caught off-guard (video)
What you should focus on now
The substance is the ability of a Luxembourg entity to exercise its function, manage and control the associated risks, with its own employees in Luxembourg. These operations don’t have to be full time. In addition, the entity can outsource supporting functions as long as it makes decisions in Luxembourg.
The tax administration has been clearly unfavourable to structures holding annual board meetings with external board members. The Luxembourg entity has to be part of the information flow and the decision-making process.
Risk aspect and capacity to bear the risk – The expectation is that the Luxembourg entity is fully exposed to risk (default risk). It, therefore, needs to have the associated equity to bear the risk and mitigate it. However, if there’s no risk, the Luxembourg entity doesn’t qualify as a beneficial owner.
Commercial rationale/comparability – When performing the Transfer Pricing/value chain analysis and quantification, entities should the commercial rationale, They also have to prove that independent parties (with a comparable functional profile) would enter into a comparable set of arrangements.
Safe harbour/simplification rules – The rule limiting the capacity to bear the risk to 1%, with a maximum amount of EUR 2 million doesn’t apply anymore.
- The concepts of Basel III to determine the adequate equity level applies if the Luxembourg entity has a profile similar to a regulated entity.
- The market/arm’s length return of this equity could be 10% after tax in the view of the Luxembourg Tax Authorities.
- The compensation should result in a 2% income after tax for pure intermediary functions.
Watch our previous interview on Luxembourg new tax rules.