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The emerging importance of transfer pricing documentation
On 19 December 2014, the Luxembourg legislator adopted new transfer pricing legislation that formalises the application of the arm’s length principle and the requirement for transfer pricing documentation. Taxand Luxembourg discusses the legislation.
Luxembourg companies may enter into diverse commercial and financial transactions with associated companies (so-called 'controlled transactions'). For Luxembourg tax purposes, the terms and conditions agreed in intragroup transactions have to adhere to the arm’s length principle. Under the arm’s length principle, transactions within a group are compared to similar transactions between unrelated entities to determine acceptable transfer prices.
As a member of the OECD, Luxembourg adheres to the organisation’s transfer pricing guidelines for multinationals and tax administrations (the 'OECD TP Guidelines') which reflect the consensus of OECD member countries towards the application of the arm’s length principle as provided in Article 9 of the OECD Model Tax Convention. Accordingly, transfer prices that are determined in accordance with the OECD TP Guidelines will be accepted by the Luxembourg tax authorities.
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It is not new that Luxembourg companies have to adhere to the arm’s length standard when entering into transactions with associated companies. However, the new transfer pricing legislation explicitly introduces the arm’s length principle into Luxembourg tax law, completing the set of Luxembourg transfer pricing rules. Going forward the new Article 56 of the LITL will serve as a legal basis for upward and downward adjustments when advantages are shifted in controlled transactions.