Transfer Pricing Forum - Transfer Pricing for the International Practitioner - APRIL 2021 - Loyens & Loeff

Transfer
Pricing Forum
Transfer Pricing for the
International Practitioner

Reproduced with permission from Transfer Pricing Forum,
12 TPTPFU 10, 4/1/21. Copyright © 2021 by The Bureau
of National Affairs, Inc. (800-372-1033) http://www.bna.com

APRIL 2021

Winter 2020 / Spring 2021: Transfer Pricing Forum

Luxembourg
Peter Moons and Sophie Ogden
Loyens & Loeff Luxembourg

Legislation
The OECD Guidelines

As Luxembourg has positioned itself as a major financial centre and a key jurisdiction for the fund industry,
Luxembourg companies are most often involved in financial transactions (such as intra-group loans, cash
pooling activities, guarantees, etc.). Hence, the publication of the final version of the OECD Guidance on
Financial Transactions in February 2020 constituted an important development for Luxembourg’s transfer
pricing environment. The parliamentary history leading to the adoption of a domestic transfer pricing
provision, i.e., Article 56bis of the Luxembourg Income Tax Law, 1 directly refers to the OECD Transfer Pricing
Guidelines (OECD TPG), giving the guidelines some degree of authoritative status for Luxembourg tax
purposes.

On December 18, 2020, the OECD released its guidance on the transfer pricing implications of the COVID-19
pandemic. However, the Luxembourg tax authorities (LTA) have neither published any specific guidelines on
the impact of COVID-19 on Luxembourg transfer pricing studies or documentation, nor made any specific
statement on the OECD guidance. Whether a company’s existing transfer pricing analysis needs to be
updated, whether any key aspect of an advance pricing agreement (APA) is no longer satisfactory and how
to incorporate the economic effect of the crisis into the benchmarking process will, therefore, have to be
established on a case-by-case basis.

ATAD 2

The Luxembourg law implementing the EU Anti-Tax Avoidance Directive 2017/952 extending the scope of
“ATAD 1” with regard to hybrid mismatch with third countries (known as “ATAD 2”), is applicable from
January 1, 2020. 2 In summary, ATAD 2 extended the scope of the already existing anti-hybrid rules
introduced by ATAD 1 to encompass situations that arise between EU Member States and third countries, as
well as to all types of hybrid mismatches (i.e. hybrid entity mismatches, reverse hybrid mismatches,
permanent establishment (PE) mismatches, tax residence mismatches and imported hybrid mismatches).
Even though the ATAD 2 Luxembourg law is not strictly related to transfer pricing, it has relevance in this
context since a Luxembourg company may not be able to fully deduct its expenses despite, for instance, the
fact that it is in compliance with an arm’s length interest rate on its intra-group debt. Transfer pricing
adjustments (for example, the imputation of interest on an interest-free loan) that are not picked up in both
jurisdictions are not caught by the anti-hybrid mismatch rules. 3 In other words, transfer pricing adjustments
remain out of the scope of the Luxembourg ATAD 2 law.

1
  Note that Luxembourg Income Tax Law, Article 56bis was introduced by the 2017 Budget Law.
2
  Law of December 20, 2019.
3
  It could nevertheless be caught by other rules, such as the EU state aid rules.

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Winter 2020 / Spring 2021: Transfer Pricing Forum

Rulings/APAs

The 2020 Budget law provides that tax rulings obtained prior to 2015, i.e., under the old ruling procedure,
automatically expired by the end of the 2019 fiscal year. The formal procedure for obtaining an APA is the
same as that for other types of rulings. However, in 2016, in its circular on intra-group financing activities, the
LTA took the opportunity to take the position that all APAs concluded under the former transfer pricing
provisions were no longer valid. As a result, while most APAs received prior to 2015 are not impacted by this
measure, APAs relating to other transfer pricing matters (for example, IP) granted before 2015 are no longer
valid with effect from fiscal year 2020.

Other rulings that have expired may also have an indirect effect on taxpayers’ transfer pricing positions. For
instance, an advance tax decision confirming the debt/equity treatment of an instrument should be re-
examined, taking into account also the new OECD Guidance on financial transactions.

DAC 6

Luxembourg implemented EU Directive 2018/822 of May 25, 2018, introducing mandatory disclosure rules
for advisors and other intermediaries (DAC 6). Under these rules, intermediaries are legally required to
disclose information to the EU Member States’ relevant authorities on certain advice given and services
rendered regarding cross-border tax planning arrangements that qualify as “reportable cross-border
arrangements.” An arrangement is reportable if it meets one of the “hallmarks.” The hallmarks under
category E relate to transfer pricing, although based on their wording, the hallmarks can also be met even
outside the context of transfer pricing.

Cases and Rulings
Case-Law

Unlike 2019, 2020 was rather uneventful in terms of significant transfer pricing domestic case-law in
Luxembourg.

The latest most relevant case dates to 2019. In its decision of July 17, 2019, the Court of appeal confirmed the
reclassification of part of the interest paid on a shareholder loan as a hidden profit distribution, to which a
15% withholding tax applies. 4 In the case at hand, a Luxembourg company acquired French real estate and
refinanced the acquisition costs in 2011 with a shareholder loan bearing an interest rate of 12%. In 2014, the
LTA challenged the interest rate for fiscal years 2011 and 2012 and, instead, applied the average 12-month
interbank rate of the years of the loans (1.87% for 2011 and 0.82% for 2012), plus a risk premium of 1.70%,
which corresponds to an interest rate on the shareholder loan of 3.57% and 2.52% for 2011 and 2012,
respectively. The risk premium used is derived from an earlier, unrelated court ruling. The Luxembourg
entity objected to the LTA’s decision and submitted two transfer pricing reports prepared in accordance with
the OECD guidelines: Study A made in October 2014 after the challenge by the LTA, which supports an
arm’s length interest rate in the range of 3.21% to 7.88%; and Study B made in 2017 for purposes of the case,
which supports an arm’s length interest rate in the range of 9.95% to 19.61%.

4
    Administrative Court decision 42043C of July 17, 2019.

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Winter 2020 / Spring 2021: Transfer Pricing Forum

It is worth noting that the LTA refused to apply Study A for the year 2012 based on the Study A conclusion
that the interest rate should be reviewed every year. Furthermore, the LTA took into account the fact that the
transfer pricing reports were drafted after the issuance of the shareholder loan. These elements demonstrate
the importance of the content and timing of transfer pricing documentation, as well as how the LTA arrives at
an interest rate on reclassification.

The Court decided that the OECD Guidelines could not influence the interpretation of the provision on
hidden profit distributions for a number of reasons: (i) the domestic provision had been adopted long before
the OECD Guidelines; (ii) the scope of Article 9 of the OECD Model Convention is wider than that of the
relevant Luxembourg law provision; and (iii) a tax treaty only allocates taxing rights to the Contracting States.
The Court did, however, acknowledge that the OECD Guidelines may be used as an “element of
appreciation.” Since the case relates to a loan granted prior to the introduction of the new transfer pricing
provisions in Luxembourg law and their explicit reference to the OECD Guidelines, a distinction needs to be
made between shareholder loans made before 2017 and loans made in 2017 or after.

The Court sided with the LTA that the circumstances indicating the existence of a hidden profit distribution
were sufficient for the burden of proof to lie with the taxpayer. The taxpayer was not able to demonstrate the
absence of a tax benefit, especially in light of an investment climate characterized by low interest rates and
the Court disputed the argument that the lack of cash flows could lower credit rating when the purpose of
the transaction concerned was to rely on a capital gain on exit. Accordingly, the Court discarded Study B and
sided with the LTA as their findings were also supported by Study A.

In a European context, on July 15, 2020, the General Court annulled the European Commission’s decision in
the Apple case 5 finding that the Commission had not demonstrated that a selective advantage had been
granted and, therefore, that there was no state aid. The Court nonetheless confirmed the application of the
arm’s length principle as a general principle of EU law. The General Court also concluded that the allocation
of IP to a company may not be justified if the company only bears the related costs and provides support
functions with the strategic decisions being made elsewhere. The case concerned two tax rulings issued by
the Irish tax authorities to two Apple companies that carried on an activity in Ireland via their Irish PEs. The
rulings confirmed the allocation of profits to the foreign head offices. The Commission filed an appeal
against the General Court’s decision before the Court of Justice of the European Union (CJEU) 6, which is
only possible on a point of law, which is currently pending.

The Fiat case 7 is currently pending before the CJEU (appeal) 8. The Amazon 9 and Engie 10 cases are pending
before the General Court. The Commission has also opened formal state aid investigations into the

5
   Cases T-778/16 Ireland v Commission and T-892/16 Apple Sales International and Apple Operations Europe
v Commission.
6
   Appeal Case number C-465/20 P Commission v Ireland and Others.
7
  Cases T-755/15 Luxembourg v Commission and T-759/15 Fiat Chrysler Finance Europe v Commission.
8
   Appeal Case number C-885/19 P Fiat Chrysler Finance Europe v Commission.
9
  Cases number T-816/17 Luxembourg v Commission and T-318/18 Amazon EU and Amazon.com v
Commission.
10
   Cases number T-516/18 Luxembourg v Commission and T-525/18 Engie Global LNG Holding and Others v
Commision.

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Winter 2020 / Spring 2021: Transfer Pricing Forum

Huhtamäki 11 case in Luxembourg, and the Nike 12 and Ikea 13 cases which are still pending. The issues in these
cases are relevant to Luxembourg transfer pricing practice.

Rulings

The number of APAs submitted to the LTA has drastically decreased since the release of the circular in late
December 2016. In 2016, the LTA made decisions on 118 APAs whereas in 2019, the LTA decided on only
three APAs, of which two were rejected. 14 The drop in the number of APAs can be explained partly by the
tightened requirements set out in the circular on intra-group financing activities for intra-group loans, and
partly by the remarkable unpredictability of the LTA’s views on specific transfer pricing issues. That being
said, the LTA is willing to discuss transfer pricing matters in specific cases and to issue APAs in general.

Transfer Pricing Documentation
No new transfer pricing documentation requirements were issued in 2020.

Currently, there are no master file or local file requirements in Luxembourg. There is a country-by-country
reporting (CbCR) obligation that is, to a large extent, aligned with the OECD requirements.

Luxembourg taxpayers are required to substantiate the correctness of their tax returns and to provide
transfer pricing documentation on request. What transpires from existing case-law is that taxpayers should
have their transfer pricing documentation ready to hand and should anticipate their obligations. It is
therefore recommended that a pro-active approach should be taken and that transfer pricing studies should
be planned in advance of, or concomitantly with, the transaction under review. Transfer pricing should be an
integral part of a tax-structuring analysis and should not be seen as a mere compliance exercise. The
existence of transfer pricing documentation is not sufficient in itself. It is also worth noting that Luxembourg
applies the substance-over-form principle.

Transfer Pricing Examinations/Audits
The number of transfer pricing documentation requests continued to increase in 2020 and the trend is
expected to remain steady for 2021. Many taxpayers received a letter requesting their transfer pricing
documentation, and in particular, documentation to support interest rates on intra-group loans concluded
with related parties. The LTA also requested transfer pricing documentation in connection with liquidated
companies and companies concluding interest-free loans.

The number of tax disputes is also increasing, with an intensified focus on transfer pricing. Given that it is a
topical issue in the current international environment, transfer pricing is very much on the radar of the LTA
during tax audits.

11
   Commission Opening Decision number SA.50400 (2019/C) (ex 2019/NN-2) Possible State aid in favour of
Huhtamäki, OJ 2019/C 161/02.
12
   Commission Opening Decision number SA.51284 (2019/C) (ex 2018/NN) Possible State aid in favour of
Nike, OJ 2019/C 226/03.
13
   State Aid investigation SA.46470 (2017/C) Possible State aid in favour of Inter IKEA- Extension of the formal
investigation, OJ 2020/C 228/02.
14
   Rapport d’activité du ministère des finances – Annexes exercices 2019, p.130.

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Winter 2020 / Spring 2021: Transfer Pricing Forum

MAPs

On December 20, 2019, Luxembourg enacted a law implementing the EU Directive 2017/1852 of October 10,
2017, on tax dispute resolution mechanisms, which sets out the applicable procedures in case of a tax
dispute derived from differences in the application of a tax treaty or convention between Luxembourg and
any other EU Member State with which Luxembourg has concluded a tax treaty.

Within the framework of BEPS Action 14 and 15, Luxembourg signed the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent BEPS (MLI), which, among other things, introduced a
mandatory binding mutual agreement procedure (MAP) arbitration article. In this context, the LTA released a
circular 15 clarifying the procedure to be followed for the resolution of a tax dispute as provided for in tax
treaties. The circular also specifies that a MAP case can be opened for transfer pricing adjustments made by
the taxpayer in good faith in another jurisdiction. While the Luxembourg law on tax dispute resolution
mechanisms deals only with intra-EU disputes, the circular deals with all tax treaties. It remains to be seen
whether the LTA will update its circular.

The number of new transfer pricing MAP cases initiated remained stable between 2018 and 2019 (2020
statistics are not yet available). 16 It should be noted that transfer pricing cases concerning the
attribution/allocation of profits between associated enterprises or between a head office and a PE and any
other TP issues would be classified under “other” in the OECD’s MAP statistics.

Impact of COVID-19
The LTA did not publish or communicate any specific guidance on the impact of the COVID-19 crisis on
transfer pricing. However, the legislator and the LTA did provide numerous extensions for filing deadlines
and loosened the conditions for relief in relation to advance tax payments, as well as introducing other
measures. The OECD guidance in relation to COVID-19 and transfer pricing is expected to prove
authoritative in Luxembourg.

What Can We Expect in 2021?
The LTA is expected to continue to ask Luxembourg taxpayers to provide transfer pricing documentation
substantiating the determination of the interest rates on intra-group loans, primarily to ensure that taxpayers
are compliant with their obligations. In addition, Luxembourg is experiencing a growing interest in bilateral
APAs and recourse to MAPs.

15
   Circulaire L.G. – Conv. D.I. n°60 du 28 août 2017 concernant les modalités de mise en œuvre de la
procédure amiable prévue par les conventions fiscales bilatérales conclues par le Luxembourg.
16
   See 2019-map-statistics-luxembourg.pdf (oecd.org) and 2018-map-statistics-luxembourg.pdf (oecd.orgol
(last consulted February 15, 2021).

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Winter 2020 / Spring 2021: Transfer Pricing Forum

In October and November 2020, the OECD released its reports on Pillar One (the “Unified Approach”) and
Pillar Two (the “Global Minimum Tax Rate”) for public consultation. The OECD has set itself the ambitious
target of achieving political consensus by mid-2021. If this consensus is achieved, the authors expect there to
be an impact on national transfer pricing practices. The same can be said regarding the draft directives of
the EU Commission included in its package on fair taxation of the digital economy released on January 14,
2021.

The next edition to the OECD TPG should be available in 2021 and will incorporate all the updates and new
chapters published since 2017 (for example, the guidance on financial transactions).

Peter Moons is a Tax Partner and Head of the Transfer Pricing team at Loyens & Loeff Luxembourg. Sophie Ogden is
a Tax Adviser and Transfer Pricing Specialist at Loyens & Loeff Luxembourg. They may be contacted at:
peter.moons@loyensloeff.com
sophie.ogden@loyensloeff.com
www.loyensloeff.com

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