On 27 December 2016, the Luxembourg tax authorities issued a new circular on Luxembourg financing companies (“Circulaire du directeur des contributions L.I.R. n ° 56/1 – 56bis / 1 du 27 décembre 2016”, hereinafter referred to as the “Circular of 27.12.2016”).
The circular of 27.12.2016 is very detailed and extensive, so here is a summary of the most important statements:
The circular is based on Article 56bis of the Luxembourg Income Tax Act (“LITA”), which was introduced as part of the implementation of the BEPS projects and the OECD Transfer Pricing Guidelines. Pursuant to Article 56bis LITA, any transaction between affiliates (e.g., financing, licensing, shared services, etc.) must comply with the so-called “arm’s length principle”.which means that these transactions must be executed on the same terms as under external third parties (“arm’s length principle”).
For this purpose, in a first step, the framework conditions of the transaction between affiliated companies are identified (e.g. contractual relationships, functions / roles of the participating companies and associated risks) and then in a second step with comparable transactions in the open market to be compared among third parties. This comparison provides the appropriate compensation for the transaction between the affiliated companies.
In the circular on the financing companies of 26.12.2016, the analysis of the risk associated with the financing plays a central role. This risk, as well as the resulting minimum capital requirement and the required fair compensation, must always be determined separately for each transaction.
Important: In the circular of the Luxembourg tax administration to finance companies of January 28, 2011, which contained the 1% – cap or the EUR 2 million cap for the minimum capital, is from January 1, 2017. no longer applicable.
However, the following simplification rules apply:
Luxembourg finance companies subject to Basel regulation. It is assumed that the minimum capital required under the Basel guidelines is sufficient. The minimum remuneration is 10% (after taxes) in terms of own funds.
Financing companies that act as intermediary, i.e. whose loan claim is financed by borrowed capital, as a loan is treated as a just “pass through” loan. The required minimum capital must in principle be determined for each transaction on the basis of the risk associated with the financing acitivity. The minimum remuneration for these companies is 2% (after tax) in relation to the loans financed by debt capital. In these cases no separate transfer pricing study has to be created.
The other requirements for Luxembourg financing companies, in particular those set out in the Circular of the Luxembourg Tax Administration of January 28 , 2011, must be met.
You will find attached an unofficial English translation of the circular of 27.12.2016.
Circular LIR 56-1 and 56bis-1 UNOFFICIAL ENGLISH TRANSLATION