Luxembourg introduces transfer pricing documentation requirement for controlled foreign company compliance

By Danny Beeton, Arendt & Medernach

The Luxembourg Tax Administration has published a circular letter which sets out their detailed view of how the Luxembourg Tax Law applies to controlled foreign companies. 

In order to show that undistributed CFC profits are not the result of non-genuine business arrangements (which would make them taxable in Luxembourg), taxpayers must be able to hand over an annually updated functional analysis on request. This must show where the significant people functions in relation to the important assets and risks of the CFC are carried out, according to the 4 March guidance. 

The non-distributed profit linked to any significant people functions not performed by the CFC may then be taxed in Luxembourg and the taxpayer should calculate and include this amount in its tax return.  This calculation should be made by reference to the transfer pricing rules of articles 56 and 56bis of the Luxembourg income tax law.

These requirements apply to non-Luxembourg subsidiaries which are more than 50% controlled by a Luxembourg company or its non-Luxembourg affiliates, and when the effective tax rate of the company in question is less than half the Luxembourg rate.

There are exemptions for CFCs with a low profit or a low rate of profit.

The Luxembourg CFC rules were enacted in article 164ter of the tax law in 2019 as part of the implementation of articles 7 and 8 of the EU anti-tax avoidance directive 2016/1164.  They apply for tax years commencing on or after 1 January 2019.

–Danny Beeton is of counsel in the tax department of Arendt & Medernach, Luxembourg and London.