Group Financing - How to support your operations in a post-BEPS world

One of the mail challenges in a post-BEPS world remains the sustainability of interest rates applied on long-term intra-group debt financing strategies. Beyond stringent rules on limitations of deductibility introduced in a post-BEPS world, tax authorities continue to focus on the sustainability of the rates based on the arm’s length principle, what calls for solid defense strategies and transfer pricing documentation for the taxpayer.

Our services with respect to pricing inter-company debt range from establishing an arm’s length interest late on plan vanilla loans to valuation of complex instruments incorporating conversion options. Our transfer pricing team works closely with our capital markets team to provide state-of-the-art transfer pricing solutions for inter-company debt. We support our clients in assessing and sustaining the arm’s length nature of interest rates on existing funding arrangements, as well as setting up pricing policies covering multiple loans on a go-forward basis. Our team has extensive experience in centrally running debt-pricing projects covering a large number of cross-border loans, coordinating with local country transfer pricing specialists and ensuring consistency of approach and results, as well as various cost efficiencies.

Make sure it is not a mere back to back

Corporates and investment firms operating Luxembourg companies that provide loans to affiliated entities that are refinanced by debt are expected to align on a new Circular of the tax authorities addressing the transfer pricing aspects of group financing activities. The Circular, effective 1 January 2017, focuses on substance and robust transfer pricing analysis as factors of critical importance for supporting the legitimacy of inter-company financing arrangements.

Operational Substance

Our services with respect to the operational substance requirements of the Group Financing Circular include support with ensuring the right type and level of functionality for a Luxembourg company providing inter-company loans, allowing the company to evidence control over risk if scrutinized by the tax authorities. Operational substance is crucial for managing tax risks, including beneficial ownership risks potentially arising in countries where the funding is ultimately dispatched. Our transfer pricing team works closely with our corporate governance and management-consulting experts to provide tailor-made operational substance solutions. Whether we advise on specific employee matters or undertake a full-scale review of corporate processes and documentation, we constantly strive for the most efficient solution in line with our client’s business model and practices.

Computing minimum equity and arm’s length remuneration

We compute the minimum level of equity that a group financing entity should maintain in accordance with the Group Financing Circular based on best practices of conducting financial risk analysis. We also compute the correct arm’s length remuneration of the company consistently with Luxembourg’s legislation and the practices of the Luxembourg tax authorities, as well the OECD Transfer Pricing Guidelines. We document the analysis and computations in a transfer pricing report to be used in support of tax returns in Luxembourg or as a defense file in case of queries by the tax authorities. Our approach and deliverables are designed to achieve reliable protection while maximizing cost efficiencies in the particular business set-up of our clients.