International Tax Planning and Transfer Pricing Planning: Luxembourg from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The high tax country Luxembourg in the OECD context 2.3 Transfer pricing rules of Luxembourg 2.3.1 Country-per-Country (CbC) reporting 2.3.2 Laws and rules 2.3.3 Arm's length principle 2.3.4 Transfer pricing method 2.3.5 Definition of related companies 2.3.6 Reporting requirements 2.3.7 Documentation requirements 2.3.8 Interaction between customs valuation and transfer pricing 2.3.9 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Luxembourg and the USA 2.4.1 Design of the tables 2.4.2 The treaty Luxembourg-USA in brief 2.4.3 BEPS Project progress 2.4.4 Luxembourg in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Luxembourg to the US 2.4.8 Case study 2: Interests from Luxembourg to the US 2.4.9 Case study 3: Royalties from Luxembourg to the US 2.4.10 Case study 4: Management and technical service fees from Luxembourg to the US 2.4.11 Case study 6: Dividends from the US to Luxembourg 2.4.12 Case study 7: Interests from the US to Luxembourg 2.4.13 Case study 8: Royalties from the US to Luxembourg 2.4.14 Case study 9: Management and technical service fees from the US to Luxembourg 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Luxembourg confirms in 2016 with a gross domestic product (GDP) of US$ 60,984 million the eighteenth-highest GDP of the European Union. In Luxembourg, the combined corporate income tax rate (company tax increased by the surcharge and the municipal business tax) is 29.30%. In addition, the corporate tax system in Luxembourg is, in principle, classical. Thus, Luxembourg is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Luxembourg has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Luxembourg, economic growth is projected to remain robust, due to ongoing supportive monetary conditions, dynamic domestic demand and a rebound in financial sector activity, which will foster exports. Inflation is projected to rise as slack diminishes and wages are pushed up by the next round of indexation, due at the beginning of 2017. Structural reforms, such as strengthening incentives to accept job offers and stricter job search obligations for recipients of unemployment benefits, would improve the use of existing skills and reduce structural unemployment. Reforms that reduce barriers to labor mobility, such as changes in housing-market and life-long learning policies, should be complemented by the provision of adequate infrastructure and public services to accommodate the needs of new residents. This chapter provides a survey on the actual tax law frame conditions in Luxembourg and provides practical support in international tax planning and transfer pricing planning between Luxembourg and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Luxembourg applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the transactional net margin method (TNMM), and the profit split method (PSM). No method is preferred over another; however, CUP and TNMM are the most frequently used methods. Companies are regarded as related if a 'special economic relationship' exists between them. The definition is wide; however, the tax authority has the burden of proof to demonstrate that a price differs from the market price because of the companies being related. There are no specific reporting requirements regarding transfer pricing put on and documentation requirements. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Luxembourg, a stable and high-income market economy featuring moderate growth, low inflation, and a high level of innovation with traditionally low unemployment, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, ^[1] Luxembourg confirms in 2016 with a gross domestic product (GDP) of US$ 60,984 million the eighteenth-highest GDP of the European Union. In Luxembourg, the combined corporate income tax rate (company tax increased by the surcharge and the municipal business tax) is 29.30%. In addition, the corporate tax system in Luxembourg is, in principle, classical. Thus, Luxembourg is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Luxembourg has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[2] in Luxembourg, economic growth is projected to remain robust, due to ongoing supportive monetary conditions, dynamic domestic demand and a rebound in financial sector activity, which will foster exports. Inflation is projected to rise as slack diminishes and wages are pushed up by the next round of indexation, due at the beginning of 2017. Structural reforms, such as strengthening incentives to accept job offers and stricter job search obligations for recipients of unemployment benefits, would improve the use of existing skills and reduce structural unemployment. Reforms that reduce barriers to labor mobility, such as changes in housing-market and life-long learning policies, should be complemented by the provision of adequate infrastructure and public services to accommodate the needs of new residents. The government has shifted towards an expansionary fiscal policy stance. This shift is welcome given the ample fiscal space afforded by low levels of debt and low interest rates. The new fiscal target will make room for a growth-enhancing tax reform, combining a reduction in corporate and income tax rates with higher tax credits for investors and low-income taxpayers. This will make the tax system more growth and equity-friendly. In addition, fiscal space could be used for growth-enhancing spending on R&D and infrastructure.

According to Orbitax, ^[3] (Daily Tax News Digest of 30 December 2016),

the Explanatory MemoOn 6 October 2016, the Portuguese government the approval of the Special Program for the Reduction of Debts to the State. Under the program, both individuals and businesses that pay outstanding tax and social security debts by the end of 2016 will not be subject to interest. The program also allows taxpayers to enter into an installment plan with a maximum duration of 11 years (150 payments) without the need to provide a guarantee. The regularization program is available for tax debts due up to 31 May 2016 and social security debts due up to 31 December 2015.

26.08.2016

According to recent reports, Greek Economy Minister Giorgos Stathakis has stated that Greece will hold the corporate tax rate at 29% for at least the next two years. The rate had been increased from 26% to 29% for tax years beginning on or after 1 January 2015 as a result of Greece's bailout.

8.8.2016

on 27 December 2016, the Luxembourg 2017 tax reform and budget laws were published in the Official Gazette. In addition to the tax reform measures introduced in Law 7020^[4], certain other tax measures are introduced in Law 7050^[5] along with the actual budget provisions.

The main measure is the addition of Article 56bis to the Luxembourg Income Tax Law, which clarifies and strengthens the rules for the determination of the arm's length based on the OECD guidelines, including the latest guidance developed as part of the BEPS project. The new article includes the following:

• The general definitions of transactions, controlled transactions, the arm's length price, etc.;

• The provision that a company must carry out all transactions in accordance with the arm's length principle, and that when a transaction is not observed between independent parties, it does not necessarily mean that it is not at arm's length;

• The provision that the determination of the arm's length price must be based on comparability analysis using transactions that are sufficiently comparable;

• The provision that transactions are sufficiently comparable if there are no material differences that would significantly impact the price determination or where reasonably reliable adjustments could be made to eliminate the impact, with the analysis of comparability based on two main pillars:

a) The identification of the commercial or financial relations between the related undertakings and the determination of the economic circumstances which relate to such relationships in order to accurately delineate the controlled transaction; and

b) The comparison of the economically significant conditions and circumstances of the accurately delineated controlled transaction with those of comparable transactions on the open market;

• The provision that the economically significant conditions, circumstances, or comparability factors that must be identified include:

a) The contractual terms of the transaction;

b) The functions performed by each of the parties to the transaction, taking into account the assets used and the risks assumed and managed;

c) The characteristics of the property transferred, the service rendered, or the undertaking entered into;

d) The economic circumstances of the parties...