In brief
On 20 January 2026, the Commission de Surveillance du Secteur Financier (CSSF) issued Circular 26/906 - hereinafter "the Circular" - consolidating central administration, internal governance and risk management requirements for Luxembourg payment institutions and electronic money institutions. The Circular enters into force on 30 June 2026.
For institutions operating within group structures, the Circular carries implications that extend well beyond governance. By embedding the arm's length standard directly into regulatory supervision and given the expanding information exchange framework between the CSSF and the Luxembourg tax authorities transfer pricing documentation is no longer solely a tax compliance exercise but a regulatory obligation.
What's new ?
Arm's length embedded in regulatory framework
Paragraph 194 of the Circular requires that transactions with related parties be carried out objectively and in the best interest of the institution to avoid conflict of interest. Transactions are considered as not compliant with that requirement when, among other criteria, they are carried out on "less advantageous terms for the institution than those which would apply to the same transaction carried out with a third party" explicitly referencing the "at arm's length" standard.
Under the Circular's governance framework, failure to demonstrate that related party transactions are conducted at arm's length — and that conflicts of interest are adequately identified, assessed, and managed — may result in supervisory findings, requirements for remedial action, and potential restrictions on the institution's activities. Institutions must be able to prove that related party transactions do not compromise the institution's financial soundness or create unmanaged conflicts of interest.
Transactions that could significantly and unfavourably influence the institution's risk profile, must be submitted to the supervisory body for prior approval (paragraph 192 of the Circular). Any material changes to significant related party transactions must be reported to the supervisory body without delay (paragraph 193 of the Circular).
Related parties
The definition of "related parties" under the Circular is broad. It captures:
- Group entities to which the institution belongs;
- Shareholders;
- Members of the supervisory or management body (including spouses, registered partners, children and parents); and
- Commercial entities in which those individuals hold qualifying holdings of 10% or more of capital or voting rights, exercise significant influence, or hold senior management positions.
When would an institution be subject to transfer pricing rules? The answer lies in the nature of its transactions. Where an institution enters into transactions with the related parties identified above, whether for technology services, licencing, data processing, management fees, or funding arrangements, these transactions fall within the scope of Luxembourg's transfer pricing framework.
The Circular therefore creates a direct intersection between the regulatory supervision and the Luxembourg Tax/TP regulations where:
- the same related party transactions that require prudential governance oversight are those that must satisfy the arm's length principle under tax law.
This effectively covers the full spectrum of intercompany relationships typically subject to transfer pricing analysis.
Practical implications
Three considerations arise for institutions and groups operating in Luxembourg's payments and e-money sector:
1. Alignment of transfer pricing policy, governance, and documentation.
The Circular reinforces the need for a coherent and integrated approach to intercompany pricing to ensure compliance with the arm’s length standard. In general, a proper transfer pricing compliance framework consists in:
- Transfer pricing policy - establishes a forward-looking framework that anticipates intercompany transactions and sets the pricing methodology per transaction type;
- Transfer pricing governance - provides the procedural infrastructure — implementing transfer pricing policies through internal processes, approval workflows, escalation procedures, and ongoing monitoring mechanisms aligned with supervisory body oversight requirements of the Circular;
- Transfer pricing documentation - constitutes a retrospective record that proves whether intercompany transactions were conducted in line with the arm's length principle.
All three layers should be consistent with the arm's length representations made at supervisory body level. A disconnect between any of these elements, for instance, a transfer pricing policy that sets one methodology while the documentation reflects another, or governance procedures that do not capture the transactions flagged in the policy, creates exposure on both regulatory and tax front.
2. Board-level oversight of intercompany pricing.
Material related party transactions require supervisory body approval and ongoing monitoring. Institutions should therefore coordinate closely with compliance and legal teams to ensure that actual pricing rationales for all related party transactions are properly documented and presented to the board. The natural instrument for demonstrating compliance with the arm's length requirement at governance level is a robust transfer pricing analysis and contemporaneous documentation.
3. Proactive transfer pricing analysis as a dual-purpose governance tool.
Given the information exchange mechanism under Law n° 8186A (discussed below), a well-structured transfer pricing analysis serves both the CSSF's governance requirement and provides a defensible position should the Luxembourg Tax Authorities (LTA) receive information from the CSSF regarding related party dealings. Institutions that treat transfer pricing documentation as a standalone tax compliance exercise, disconnected from prudential governance, face an emerging gap.
For groups where the Luxembourg payment or e-money entity operates within a wider digital ecosystem, where a regulated entity, a technology entity, and a data infrastructure entity each contribute to value creation, the Circular would therefore further reinforce the need for functional analysis that maps value creation to the regulated entity, ensuring both prudential substance and transfer pricing coherence.
The Law of 20 December 2024 implementing draft bill n° 8186A dimension: CSSF-to-LTA information exchange
The implications extend beyond solely regulatory considerations. The law dated 20 December 2024 implementing draft bill n°8186A, effective as from 1 January 2025, introduced a legal framework in Luxembourg facilitating the exchange of information between governmental bodies, including the CSSF and the LTA. This mechanism means that governance findings relating to related party transactions, including any arm's length concerns identified under the CSSF's supervisory activities, could, in principle, be shared with the LTA (or vice versa).
The traditional separation between regulatory supervision and tax administration is narrowing. For institutions subject to the Circular, the arm's length standard is no longer solely a transfer pricing concept, it is now also a regulatory and governance benchmark with potential tax authority visibility.
This dimension amplifies the urgency of the practical steps outlined above. Institutions that have aligned their transfer pricing policy, governance, and documentation with the Circular's requirements will be better positioned should the LTA receive supervisory information regarding related party transactions. Those institutions that have not adequately ensured a proper compliance, may find that any potential gaps identified by the CSSF might also translate into transfer pricing exposure vis-à-vis the LTA.
Key takeaways
The Circular makes the convergence of prudential regulation and transfer pricing explicit for Luxembourg payment and e-money institutions. Three priorities emerge ahead of the 30 June 2026 effective date:
- Review and, where necessary, establish a transfer pricing policy framework that anticipates intercompany transactions and aligns with supervisory body governance requirements;
- Implement transfer pricing governance procedures that integrate board-level approval and monitoring obligations under the Circular; and
- Ensure transfer pricing documentation contemporaneously evidences arm's length compliance — serving both tax and regulatory purposes.
The information exchange framework under Law n° 8186A adds a further dimension: transfer pricing framework and transfer pricing compliance is no longer solely a tax exercise but a regulatory requirement with potential supervisory consequences.
For more information, please contact your usual PwC Luxembourg advisers.
