Expert Insights: Transfer Pricing Audits in Luxembourg and Future Developments
Luxembourg News: As businesses operating in Luxembourg have experienced, transfer pricing (TP) tax audits are becoming more frequent, with the Luxembourg tax authorities (LTAs) placing a particular focus on financial transactions. While advance pricing agreements (APAs) were previously relied upon, the number of APAs has fallen over the last five years, leading to an increase in tax audits as a regular procedure.
For those undergoing a TP audit, it is important to prepare extensive information to enable the LTAs to investigate thoroughly. Taxpayers may possess TP documents, but the LTAs can ask for more documentation, such as general ledger extracts, contract agreements, and board meeting minutes, to thoroughly examine the management of financing operations and the control of associated risks.
In addition to testing taxpayers' readiness, these audits also aim to test their attitudes. However, the lack of a clear deadline specified in the regulations means that the deadlines granted by the LTAs can vary greatly, ranging
from several weeks to just a few days.
While there is no specific deadline for completing the investigation, except for the five-year statutory limitation, taxpayers may not receive a response for some months after providing the requested information, which is not favorable compared to other European jurisdictions. In this regard, it is essential for taxpayers to have supporting corporate and internal documents readily available.
During an audit, the LTA will seek direct contact with the taxpayer's representatives, and it is recommended that the company invite tax specialists, such as the group's tax director or an external service provider, to any meetings. It is possible that the management may not have sufficient tax knowledge to answer the technical queries raised by the LTA regarding the submitted documentation. In such a scenario, having tax specialists present would not be considered a deficiency in the company's internal capabilities or substance, but instead would demonstrate the willingness of the taxpayer to
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When an audit is concluded and a tax reassessment is issued, the taxpayer has two choices if they owe additional taxes: they can either accept or reject the reassessment. If the taxpayer rejects the reassessment, they must submit a written claim to the head of the LTA, which is known as a hierarchical appeal. However, under current tax laws in Luxembourg, there is no compulsory dialogue between the taxpayer and the LTA to reach a mutually agreeable solution and avoid litigation.
The head of the LTA may then only affirm or cancel the tax reassessment, and hierarchical appeals are often rejected, leaving taxpayers with the choice to accept the tax reassessment or appeal through court litigation. If the taxpayer decides to challenge the reassessment, they are required to first pay the tax amount that has been levied. In Luxembourg, tax laws and judicial rulings typically reject guarantees from parent companies in favor of cash being
in an escrow account. This can dissuade taxpayers from contesting the LTA's stance, particularly when they are required to deposit significant sums of cash.
There is a need for changes to current legislation, particularly with regards to deadlines and the possibility of settling disputes before going to court. While TP is often viewed as an art rather than an exact science, there is always room for discussion on any TP position reached by the taxpayer. It is crucial to resolve this matter in a prompt manner and preferably without resorting to the courts, as litigation in Luxembourg can be a prolonged process that can take several years to culminate in a final decision.
Overall, businesses facing TP tax audits in Luxembourg need to be well-prepared and have extensive information readily available to the LTAs. It is also recommended to have tax specialists present during any meetings with the LTA to address any technical questions about the documentation submitted.