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Conditions to Obtain a New APA
During the course of 2011, the Luxembourg direct Tax Authorities issued two Circulars, which deal with the tax treatment of intra-group financing transactions. The purpose of the initial Circular was to confirm the application of the OECD transfer pricing guidelines to intra-group financing, and to formalise the procedure for applying for an Advance Pricing Agreement (APA). Since the initial Circular gave no date for its entry into force, a second Circular was released. The latter states that from 1 January 2012, the Tax Authorities are no longer bound by APAs obtained before 28 January 2011 (date of the initial Circular) in relation to intra-group financing transactions, which would otherwise fall within the scope of the initial Circular. Taxand Luxembourg considers the adoption of the OECD transfer pricing guidelines by the authorities and how taxpayers may benefit from APAs.
This means that as of 1 January 2012, APAs obtained prior to the Circulars are no longer valid and that if tax payers wish to obtain a new APA, they will have to follow the requirements of the initial Circular.
For each individual intra-group financing transaction, the practical impact of the Circulars depends on the facts and tax payers have 2 possibilities:
- First possibility: file tax returns going forward in line with the expired APA
- Second possibility: apply for a new APA
As far as the second possibility is concerned, ideally, the request for a new APA should have been filed before 31 December 2011, or at least, any modifications to the financing structure should have been made by this date or shortly afterwards. Currently, that is still an option and tax payers can still submit a new request and/or adapt their finance structure.
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These two Circulars can be seen in the light of the desire of the Luxembourg Tax Authorities to reiterate their Advance Pricing Agreement (APA) practice with OECD transfer pricing principles and are thus a positive development for Luxembourg. Tax payers who now want to benefit from an APA have to make sure that they follow the new guidelines of the Circulars. Even though the process of obtaining a new APA on existing financing structures has not been finalised as of the end of last year and tax payers can still keep on introducing new APAs today, we recommend that tax payers review their individual situation with their tax advisor as soon as possible to ensure that they are in line with the Circulars.