Luxembourg: Recent cases highlights the importance of timely and complete transfer pricing documentation to support intercompany pricing arrangements.
Source: Luxembourg Times; Alessandra Cea, Transfer Pricing Senior Manager PwC Luxembourg; Marc Rasch, Transfer Pricing Partner PwC Luxembourg
In case law n °, 40348 (22 October 2018), a Luxembourg entity received a shareholder loan bearing an interest rate of 12%, which was used to partially finance the acquisition of a building in France.
In the tax authority’s view, the 12% rate was not sufficiently supported, and therefore not considered to comply with the arm’s length standard. The tax authority argued that the interest rate should be reduced significantly.
The taxpayer prepared two transfer pricing (TP) studies. A first TP study was provided in the course of the tax audit. Since this was not sufficiently supporting a 12% rate, a second TP study was provided later, together with the claim filed with the Tribunal. Despite the first TP study being established after the request of the tax authority, its admission was not disputed. Conversely, the admission of the second TP study was questioned by the tax authority.
In this respect, although the second analysis was formally admitted to the trial, the Tribunal decided to take into account only the first TP study.
A second case law (n° 40251 of 7 January 2019) focuses on a decision of a Luxembourg company that waived loans granted towards its subsidiaries and impaired participations held in foreign start-ups. In the tax authority’s view, the taxpayer’s decision does not correspond to what independent parties would do (i.e. not in compliance with the arm’s length principle).
In this case, the Tribunal agreed with the tax authority as the taxpayer did not provide sufficient elements to reverse the tax authority’s arguments.