• Service: Tax
  • Type: Business and industry issue, Newsletters, Publication series
  • Date: 1/28/2011


Philippe Neefs

Transfer Pricing Leader

Tel. +352 22 51 51 5531


Sophie Boulanger

Senior Tax Adviser

Tel. +352 22 51 51 5423

Luxembourg Tax News - Issue 2011-02 

January 2011

Luxembourg publishes circular on Transfer Pricing applicable to companies realizing intra-group financing transactions

On 28 January 2011, the Luxembourg Tax Authorities published a transfer pricing circular aiming at clarifying the tax treatment of companies principally realizing intra-group financing transactions ("Circulaire du directeur des contributions L.I.R. n°164/2 du 28 janvier 2011").

On the Luxembourg market, the publication of this circular is a significant step forward with respect to the application of transfer pricing principles. Indeed, but for specific provisions in the Luxembourg Income Tax Law and the General Tax Law, no transfer pricing legislation had been formalized as such until now.

This circular globally refers to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("the OECD Guidelines") for the application of transfer pricing principles to multinational groups investing through Luxembourg and performing an intra-group financing activity on the Luxembourg territory.

It also represents a real opportunity for these multinational groups to have clear rules in Luxembourg in order to assist in evidencing the arm's length character of their Luxembourg financing transactions.

Scope of application and definitions


The scope of the circular applies to all entities principally realizing intra-group financing transactions, i.e. holding activities are out of the scope of this circular.

The circular defines very broadly "intra-group financing transactions" since it comprises any activity consisting in the granting of loans or funds' advances to associated enterprises, refinanced by financial means and instruments such as public issuances, private loans, funds' advances or bank loans.

The definition of "associated enterprises" in the circular is based on the OECD Guidelines and Article 9 of the OECD Model Tax Convention, i.e. any direct or indirect participation in the sense of management, control or capital will lead to the qualification of associated enterprise.

Considering that the Luxembourg market is largely used to locate intermediary financing activities, it is clearly understood that the circular will be applicable to a significant number of Luxembourg taxpayers and transactions.


The application of the arm's length principle as defined in the OECD Guidelines and in Article 9 of the OECD Model Tax Convention* is required for all intra-group services (including intra-group financing transactions) performed by a Luxembourg entity.

* Where "conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly"

The circular also gives general guidance on how to apply the arm's length principle, fully in line with the OECD Guidelines. Indeed, it highlights the importance of performing comparability analysis.

This aspect of the circular is very positive for multinational groups since most transfer pricing legislation of OECD Member States are strongly influenced by the OECD Guidelines.

Guidance to determine the arm's length price

Comparability to the financial sector
The circular compares to a certain extent intra-group financing companies to independent financial institutions which are regulated in Luxembourg by the "Commission de Surveillance du Secteur Financier".

Thus, it underlines the importance of determining arm's length prices used by intra-group financing companies in the same way as financial institutions usually do. This puts a strong emphasis on the analysis of risks supported by the company performing the intra-group financing transaction. In that regard, different factors will need to be taken into account such as the solvability of the borrower, the potential guarantees for specific financing transactions, the costs in relation with the financing transactions or the actual value of the underlying assets.

The risk element is considered as one of the main factors to be taken into consideration to determine the arm's length remuneration of the intra-group financing transactions. This is fully in line with the current evolution of transfer pricing practices and, in particular, with the 2010 OECD Guidelines.

Capital requirements
In order to cover the risks supported, the circular details that the financing company must have sufficient equity in relation to the transaction.

The arm's length character of the tested transaction
The circular does not give details on which elements should be tested to confirm the arm's length character of an intra-group financing transaction.

Considering the specificities of the Luxembourg market, it is likely that the transfer pricing studies performed to evidence the arm's length character of intra-group transactions will focus more on the magnitude of the margins to be realized by Luxembourg entities than on the interest rates. In that respect, the risk profile of the entity itself (from an agent to an entrepreneur) will play a significant role in the level of margin which will be benchmarked.

Binding information from the Tax Authorities


As from the date of publication of the circular, the Tax Authorities will give binding information only if:


  • The company has a real presence in Luxembourg (and not only if it is considered as a Luxembourg tax resident because it has been incorporated under the Luxembourg law).

  • The company assumes the risks in relation with the financing activity.


The substance requirement will be fulfilled based on the analysis of the following elements:

  • The Luxembourg residence of the members of the board of directors' or managers' empowered to engage the entity in particular, the majority of board members should be Luxembourg resident or, if non-Luxembourg resident, should be taxable for at least 50% of their income (listed in the circular) in Luxembourg;

  • Adequate professional knowledge and competence of those members in view of the activity of the entity and qualified personnel;

  • The place of management of the entity being located in Luxembourg and not abroad;

  • The opening of a bank account in a Luxembourg resident bank or in a Luxembourg branch of a non-Luxembourg resident bank;

  • Compliance with all tax return filing obligations;

  • The fact that the entity is not considered as a tax resident of a foreign country;

  • The capital requirement as described above.


The capital requirement is key in the circular since it may have consequences in case the taxpayer would request binding information from the Luxembourg tax. Indeed, the circular not merely indicates that capital must be adequate to functions performed, risks assumed and assets owned, but also refers to a capital of at least 1% of the financing volume or EUR 2 million as generally adequate to the risks assumed by an intra-group financing entity.

Apart from specific requirements described below, should the above-mentioned level of capital be contributed to the financing entity for the financing of its debt receivables, the Luxembourg Tax Authorities may approve the financing structure.

Moreover, in order to obtain certainty on the transfer prices of an intermediary financing company, the Tax Authorities will request certain information. In particular, the company will need to provide a transfer pricing report compliant with the OECD Guidelines, i.e. comprising a functional and risk analysis followed by the choice of a method to be applied and an economic analysis of the transaction under review.

The binding information given by the Luxembourg Authorities will be valid for 5 years (renewable for 5 years) as long as the facts and circumstances of the case at hand remain unchanged.

The circular does not address the question of its application to existing intra-group financing companies and transactions where no transfer pricing study has been carried out before the publication of the circular. Moreover, the circular does not provide a de-minimis rule below which no transfer pricing study would have to be performed.


The circular provides essential guidance as to how to apply the arm's length principle to intra-group financing transactions realized by Luxembourg companies. It highlights the growing importance of transfer pricing on the Luxembourg market.

Though there are some imprecisions in the circular, the latter should be viewed as a real opportunity for Luxembourg taxpayers to comply even more with international standards (in particular the European Union and the OECD).

KPMG Tax Luxembourg has a dedicated team to assist you in preparing transfer pricing studies.

For more information, please contact us.



The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.