Tax Treaty Case Law around the Globe 2016

S. 175Chapter 14 Luxembourg: Profit Adjustments for Interest-Free Loans in Accordance with Article 9

Werner Haslehner

14.1. Introduction

Luxembourg’s approach to transfer pricing is a multifaceted one. Although the arm’s length principle has long been applied for transactions between related companies, a general rule to formalize that approach has only been introduced with effect from January 2015. Previously, arm’s length profit adjustments were frequently based on the concepts of “hidden dividend” and “hidden capital contribution”, which the Luxembourg courts interpret broadly in line with the relevant German case law on the same. Alternatively, in case of artificial transactions without commercial justification, the tax administration could also use the general anti-abuse provision of Luxembourg’s fiscal code to adjust a taxpayer’s profit. In addition, the tax authorities have, at times, issued administrative circulars to clarify their approach to apply those wide concepts, such as the circular concerning the application of the arm’s length principle to financing companies. However, former article 56 of the Income Tax Law (LIR), arguably the most appropriate provision of Luxembourg’s in...