On December 27th 2016, the head of the Luxembourg tax authorities issued circular L.I.R. n° 56/1 – 56bis/1 relating to the tax treatment and more specifically the transfer pricing aspects of companies engaged in intra-group financing transactions (the “Circular”). The Circular was issued further to the introduction in the Luxembourg tax code of a new article which outlines the transfer pricing rules applicable to “controlled transactions” (“Article 56 bis LIR”). The provisions of Article 56 bis LIR are inspired by the OECD Transfer Pricing Guidelines and set out the methodology that must be applied to determine “arm’s length” prices.
With effect as from January 1st 2017, the Circular replaces the two previous circulars L.I.R. n° 164/2 dated January 28th 2011 and n°164/2bis dated April 8th 2011 on the same topic.
The main changes introduced by the Circular are the following:
Advance Pricing Agreements (“APA") issued on the basis of the rules applicable before the introduction of Article 56 bis LIR will no longer bind the tax authorities as from January 1st 2017 for fiscal years subsequent to 2016. It is, of course, possible to request a new APA on the basis of the new transfer pricing rules.