Luxembourg to sharpen tax rules for intra-group financing

Luxembourg announced on 27 December it would tighten its rules on intra-group financing. These new measures, entering into force on 1 January 2017, firm up the “arm’s length principle”. In other terms, financing between different units of the same company should be carried out as if they were unrelated firms. We interviewed Loek de Preter, our Transfer Pricing Leader, to understand what is at stake for Luxembourg entities.


Intra-group financing : what’s in it for entities?

The new rules tackle any entity conducting intra-group financing transactions. In other words, any activity that consists of granting loans or (cash) advances to related parties which are remunerated by interests and are refinanced by funds as well as financial instruments (e.g. public offerings, private loans, cash advances or bank loans) fall within these rules.

Tougher rules

The new measures no longer include the rule to determine the equity at risk (i.e. 1% or € 2m). Instead, entities have to make a functional analysis to determine the appropriate equity level covering the functions assets and risks of the transacting parties and their commercial relationship. In addition, the new rules highlight that entities need to get adequate substance. Most importantly, all existing transfer pricing rulings are no longer valid as from 1 January 2017.

Your checklist

As the notification is due shortly, here’s your checklist :

  1. Is your existing functional analysis and substance up-to-date?
  2. What is the risk of your intra-group finance activity?
  3. Which level of equity do you have to reach?
  4. How much do the new rules result in an increased taxable income?

Get a complete overview of the new requirements, read our newsflash.

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