On 27 October 2026, the Luxembourg Lower Administrative Court (Tribunal administratif, the “Tribunal”) delivered its judgment in Case No. 49275 concerning a transfer pricing (“TP”) adjustment on the resale of clothing to a Belgian subsidiary. Although the Direct Tax Administration (Administration des contributions directes, “DTA”) had established circumstances sufficient to shift the burden of proof to the taxpayer, the major methodological inconsistencies on both sides led the Tribunal to annul the 2016 corporate income tax and municipal business tax assessments and remit the case to the DTA for further investigation.
Background
In 2016, a Luxembourg private limited liability company (the “Company”) carried on two distinct activities. First, it purchased clothing from suppliers and resold it to its wholly owned Belgian subsidiary (“BelCo”), applying a 20% mark-up on the purchase cost of the goods resold. Second, it provided consultancy services, performed by its manager, to another company engaged in the manufacture of metal structures and related equipment. Those services were supplied to that other company, not to BelCo.
Only the clothing transactions with BelCo were subject to the disputed TP adjustment. The status of the Company and BelCo as associated enterprises under Article 56 of the Luxembourg law of 4 December 1967 on income tax, as amended (“LITL”), was not disputed. To support its 20% mark-up, the Company claimed to apply the comparable uncontrolled price (“CUP”) method. It relied on a consulting firm’s website indicating average distributor margins of 10% to 20% in the clothing sector, as well as on Belgian company accounts data extracted by its accountant, which it said yielded two margin figures for clothing and footwear wholesalers: 15.56% and 23.76%. The Company argued that these sectoral figures supported its pricing. The DTA disputed the reliability of that evidence and the existence of comparable market prices, and argued that the cost-plus method applied by the tax office was to be preferred.
To determine the cost base, the DTA took four expense categories from the Company’s accounts: raw materials, other external charges, personnel costs and other operating charges. Rather than identifying the costs actually attributable to clothing resale, it allocated 45.85% of that pool to the clothing activity, reflecting its share of the Company’s total turnover from both activities, and applied a 15% mark-up to the allocated amount. Purchases of the clothing itself were excluded from the pool. The consultancy activity therefore mattered to the dispute because of this allocation of costs between the two businesses. In particular, the Company argued that its manager’s remuneration and travel costs related exclusively to the consultancy activity.
The Tribunal’s judgment
1. The applicable framework
Article 56 LITL enshrines the arm’s length principle, requiring the taxable profits of associated enterprises to be determined by reference to the conditions that would have been agreed between independent enterprises. Article 56bis LITL, introduced with effect from 1 January 2017, sets out the framework for applying that principle, including the accurate delineation of controlled transactions, the comparability analysis and the selection of the most appropriate transfer pricing method, taking account of the functions performed, assets used and risks assumed.
The Company argued that Article 56bis LITL could not support a 2016 adjustment because it entered into force only on 1 January 2017. The government representative agreed that the provision was inapplicable. The Tribunal examined the adjustment under Article 56 LITL, which entered into force on 1 January 2015 and was therefore applicable to the 2016 tax year, notwithstanding the tax office’s erroneous reference to Article 56bis LITL.
A separate issue concerned which version of the OECD Transfer Pricing Guidelines (“OECD TPG”) should be used to interpret Article 56 LITL. The government representative relied on the 2017 edition both to challenge the Company’s CUP analysis and to support the use of cost plus, arguing that it consolidated changes made since 2010, including amendments in 2015. The Tribunal rejected that approach: the representative had not explained the nature and scope of those amendments, particularly those said to affect the choice of selecting the TP method. Moreover, the annuality of taxation and legal certainty prevented reliance on a version of the OECD TPG issued after the relevant tax year. The Tribunal therefore used the 2010 OECD TPG for 2016 as the relevant version, while stressing that the guidelines were not themselves legally binding. It did not assess what effect the 2015 changes would have had on the analysis.
2. Evidential threshold required to shift the burden of proof
Under Article 59 of the Luxembourg law of 21 June 1999 on procedure before the administrative courts, the administration must, in principle, prove the facts justifying an upward adjustment. Read together with § 171 of the General Tax Law (Abgabenordnung, “AO”) and its parliamentary materials, this does not relieve taxpayers of the duty to substantiate their transfer prices. Documentation expectations remain proportionate to the size of the enterprise and the complexity of the transactions. The Tribunal identified two stages:
following an impartial and objective examination, the DTA must identify a body of circumstances making a breach of the arm’s length principle probable. Insufficient explanations or documentation may contribute to that evidential basis;
only then does the burden shift to the taxpayer to demonstrate that the adjustment is unjustified.
That threshold was met here. Although the Company described its approach as CUP, the evidence outlined above related to margins rather than prices. It had also not sufficiently established its functional profile, explained why the selected enterprises were comparable or detailed the basis on which their margins were calculated and applied. Taken together, those deficiencies justified shifting the burden of proof.
3. Weaknesses in the taxpayer’s analysis do not validate an inconsistent adjustment
The Company nevertheless substantiated objections to the adjustment made by the DTA. The DTA had not explained why cost plus should be preferred for the resale of finished clothing. The Tribunal did not rule out that method for all such activities, but found that the DTA had not justified its selection or application. It identified several inconsistencies:
Cost base: the DTA included an accounting category labelled “raw materials”, which related to maintenance supplies, small equipment and fuel without explaining their relevance to clothing resale. At the same time, the DTA omitted the cost of clothing purchases, which the Tribunal considered to be at least partly direct costs of that activity.
Confusion between the cost-plus method and the TNMM: although the DTA stated that it was applying the cost-plus method, the costs it included in its calculation, some of which could constitute operating expenses, revealed, in the Tribunal’s view, a confusion between the mechanics of the cost-plus method and the TNMM. The latter takes operating expenses into account to determine a net margin and, ultimately, an arm’s length price. This methodological confusion also cast doubt on whether the DTA’s 15% mark-up was appropriate, particularly since it had not shown that comparable independent enterprises applied that mark-up to a comparable cost base.
Unsupported mark-up: the DTA did not explain whether independent enterprises carrying out comparable transactions would apply a 15% mark-up to a comparable cost base. The inconsistencies in its method and cost base also undermined the support for that mark-up.
Distorted allocation: the Company had actually earned a 20% mark-up on the purchase cost of the goods resold. This did not mean that the Tribunal endorsed 20% as an arm’s-length mark-up. However, by using turnover, which included already that 20% mark-up, for the determination of the allocation ratio, the DTA had, according to the Tribunal, inflated the costs allocated to the clothing activity and the resulting remuneration. The Tribunal criticized the use of a figure from the controlled transaction itself for that purpose.
4. Annulment did not validate the Company’s pricing
Given the major methodological inconsistencies on both sides, the Tribunal annulled the 2016 corporate income tax and municipal business tax assessments and remitted the case to the DTA for further investigation. It did not endorse the Company’s 20% mark-up or determine a replacement arm’s length price.
Key takeaway
A taxpayer’s inadequate or insufficient TP documentation may shift the burden of proof once the administration has identified circumstances making a breach of the arm’s length principle probable. It does not, however, make the resulting adjustment made by the administration valid by default.
The administration’s chosen method and application (i.e., cost base and allocation keys) must be consistent.
A taxpayer may successfully challenge an adjustment without establishing that its own pricing was arm’s length. Here, the Tribunal annulled the assessments and remitted the matter for further investigation and it did not validate either the taxpayer’s mark-up or that of the administration as at arm’s length.
The OECD TPG version used to interpret Article 56 LITL must be considered in light of the tax year at issue. For 2016, the Tribunal relied on the 2010 edition and rejected reliance on the later 2017 edition, citing the annuality of taxation and legal certainty. The Tribunal did not determine the substantive effect of the changes said to have been made in 2015 and incorporated into the 2017 edition.
As a first-instance judgment, this decision remains subject to appeal before the Higher Administrative Court (Cour administrative) and may therefore not be final.
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