Vecteurs de croissance au Luxembourg - Transfer pricing | Whitepaper
This edition of “Vecteurs de croissance au Luxembourg” explains the basic principles of transfer pricing, its potential impact on the business, and the opportunities that transfer pricing present for their activities with a particular focus on Luxembourg.
Section 1 of this booklet provides an introduction describing the importance of transfer pricing, its impact on the global tax burden as well as its main pillars and related trends.
Transfer pricing is the price set between two group companies for the transfer of physical goods, intangible property, services, or financing arrangements.
The transfer price for transactions between group companies has to be set so that it corresponds to the market price, taking into account the functional and risk profile and specific conditions of each of the parties (the “arm’s length principle”). The reason hereof is that the tax authorities on both sides of the transaction will assess whether the transfer price for tax purposes is in accordance with the arm’s length principle; an incorrect transfer price may lead to a tax reassessment issued by the tax authorities, potentially resulting in double taxation.
Luxembourg does not have specific regulatory requirements in terms of transfer pricing documentation (i.e. documentation describing and supporting related party transactions underlying transfer pricing, generally including: intercompany agreements, transfer pricing analysis, invoices and other relevant records such as minutes of meetings or brochures). However, an adequate transfer pricing policy remains important for Luxembourg corporate residents involved in cross-border transactions to reduce the risk that one or more of the different tax authorities involved, will challenge the transfer price and would adjust the related taxable basis.
Section 2 provides a description and guidance on the application of the arm’s length principle. Furthermore, it describes how transfer pricing is reflected in various articles of the Luxembourg Income Tax Law and through case law. It also describes how taxpayers can deal with transfer pricing upfront, e.g. via advance tax agreements with the tax authorities, or afterwards through tax audit defence with the tax authorities.
While respecting the existing tax and transfer pricing regulations, transfer pricing is particularly interesting for Multinational Enterprises in optimising their intercompany flows, and by potentially reducing their global tax burden. For any international planning, transfer pricing considerations should be made in close cooperation with corporate income taxes, VAT, and customs duties. In section 3, three opportunities are discussed: (1) central entrepreneur model, (2) new intellectual property regime, and (3) opportunities in an economic downturn.
For general interest in setting-up a business in Luxembourg or developing your existing business, please refer to sections 4 and 5, which provides an overview of the Chamber of Commerce’s role in business creation and development.
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