Luxembourg companies may enter into diverse commercial and financial transactions with associated enterprises. The prices charged in regard to these controlled transactions are called transfer prices. For Luxembourg tax purposes, these prices have to adhere to the “arm’s length principle”.
The arm’s length principle is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes by multinational enterprises and tax administrations. The arm’s length principle requires that the
consideration for any transaction between related parties conform to the level that would have been agreed if the transaction were to have taken place between unrelated parties under comparable circumstances.
The arm’s length principle is firmly ingrained in Luxembourg tax law and has been explicitly stated in article 56 of the Luxembourg Income Tax Law (LITL). In addition, several concepts and provisions under Luxembourg tax law require the arm’s length standard to be respected by Luxembourg companies.
As a member of the OECD, Luxembourg adheres to the organization’s Transfer Pricing Guidelines which reflect the consensus of OECD Member countries towards the application of the arm’s length principle as provided in article 9(1) of the OECD Model Tax Convention. Notably, this provision is frequently included in tax treaties concluded by Luxembourg.
Transfer pricing and the OECD Guidelines received a lot of attention during the OECD/G20 in their Base Erosion and Profit Shifting (BEPS) initiative. Four of the fifteen BEPS Actions aimed at providing new or changing existing transfer pricing guidance and related documentation requirements. As a result thereof, several chapters of the OECD Guidelines have been significantly amended or replaced in the 2017 Revision thereof.
This book analyses all facets of Luxembourg transfer pricing rules and relevant guidance in the 2017 version of the OECD Guidelines. As such, it should enable readers to develop a sound understanding of transfer pricing in Luxembourg.