Transfer Pricing for Financial Transactions

How PwC can help

Requirements of the 2017 Transfer Pricing Circular

Luxembourg companies carrying out intra-group financing transactions fall into scope of the 2017 Transfer Pricing Circular. Intra-group financing transaction refers to any activity comprising the granting to related enterprises of loans or cash advances, itself financed by financial means and instruments, such as public offerings, private loans, cash advances and bank loans. There are two main requirements in the 2017 Transfer Pricing Circular: (i) substance, i.e. ability to control the risk, and (ii) equity, i.e. ability to bear the risk.

Requirements of Articles 56 and 56bis LITL

Article 56 of the Luxembourg Income Tax Law ("LITL") prescribes that, where related enterprises are subject to conditions made or imposed which differ from those that would be made between independent enterprises, the profits of these enterprises are to be determined under the conditions prevailing between independent enterprises and taxed in consequence. 

Article 56bis LITL specifically refers to the arm’s length principle and states that, in determining arm’s length prices, a comparability analysis needs to be performed, involving a comparison between the conditions imposed on a controlled transaction and those imposed on a comparable open market transaction. 

Therefore, in line with the requirements of Articles 56 and 56bis LITL, amongst others, the interest rates charged on inter-company loans should comply with the arm’s length principle.

OECD Transfer Pricing Guidance on Financial Transactions

In 2020, the OECD issued a report providing transfer pricing guidance for the first time ever on Financial Transactions ("OECD FT Report"). The OECD FT Report focuses on intra-group loans, cash pooling, hedging, guarantees and captive (re-)insurance arrangements. It also separately provides guidance on the allocation of return to capital. The major themes running through this report revolve around the accurate delineation of transactions, their commercial rationale and their comparability with third party transactions notably in terms of legal agreements (e.g. the terms and conditions embedded in third party agreements versus the intra-group ones). As a result, it is expected that tax authorities across the globe will scrutinise the arm’s length nature of financial arrangements to a significantly larger extent than it was the case in the past.

Our team of transfer pricing professionals can help you:

  • Equity at risk and arm's length remuneration 

  • Substance analysis

  • Interest rate benchmarking studies

  • Debt to equity or debt capacity analysis

  • Guarantee fees

  • Hedging fees

  • Foreign exchange analysis

  • Intercompany agreements

  • Credit rating

  • Exit tax analysis

  • Cash pooling

  • Valuation


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