Transfer Pricing

Group and debts/liabilities - Arm's length Principles

The Luxembourg tax administration issued on 28 January 2011, Circular n°164/2, aims to clarify the general transfer pricing rules and the Arm's Length Principle in intra group transactions, and the tax treatment of companies conducting intra-group financing activities.

 

Transfer pricing relates to inter-company pricing arrangements concluded between related parties. The Arm's Length standard is generally applied to determine applicable transfer pricing. This means that the amount charged by one related party to another for a given product or service must be the same as if the parties were not related.

An Arm's-Length price for a transaction is therefore what the price of that transaction would be on an open market.

 

Luxembourg income tax laws 56 and 164 (3) refer to the Arm's Length Principle, yet do not contain any specific guidelines or regulations. The Circular, by outlining a process for setting and reviewing the pricing used in international financial transactions between related parties, sets up the expected framework.

The Circular is aimed at entities granting loans or cash advances to related entities refinanced by inter alia, public offerings, private loans, cash advances and bank loans. The shareholding activities are out of the scope.

Two enterprises are deemed to be related if one of them participates directly or indirectly in the management, control or capital of the other.

 

Guidance to Determine the Arm’s Length Pricing of Intra-Group Financing Activities

The Circular refers to the remuneration practices and methods in force in the banking sector to determine the transfer pricing of financial transactions carried out between two related parties. Thus, the financing entity will have to perform a "risk analysis" in respect of its debtor and take into account the following points:

  • Structure of the group;

  • Existence of guarantees in relation to the transaction;

  • Economic background and solvency of the debtor;

  • Contractual conditions of the financing;

  • Financing costs.

In addition, the Circular provides that the financing entity should have sufficient capital available to assume the risks related to the financing. In that respect, equity financing is deemed sufficient if it exceeds 1% of the financing or EUR 2 million.

 

Arm's Lenght Principles - Comparability

Specificities for INTRA-GROUP FINANCING

Possibility to obtain an Advance Pricing Agreement (APA)

 

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