Luxembourg: local rules

The arm's length principle is in article 56 of the income tax law (LIR) and article 56bis LIR, which has applied since 1 January 2017. Article 56 covers any two related enterprises, in Luxembourg or abroad. Article 56bis defines controlled transactions, requires a comparability analysis and says the most appropriate method must be used. Luxembourg follows the OECD Guidelines, and hidden dividend distributions (art. 164(3) LIR) and hidden capital contributions can also apply.

There is no statute that requires a master file or local file, and no size threshold or filing date. Under paragraph 171 of the General Tax Law (AO), a taxpayer must be able to prove the figures in its return, including transfer prices, when the tax office asks. In practice companies keep a transfer pricing report for each material intra-group transaction, and the OECD master file and local file format is allowed but not required. Financing companies have more detailed expectations under the 2016 circular L.I.R. 56/1 - 56bis/1.

Article 56bis(6) LIR says the method must give the best possible approximation of the arm's length price. The five OECD methods are accepted, and no fixed hierarchy or range method is written into law. Under the circular of 27 December 2016, a Luxembourg group financing company must have real substance in Luxembourg and enough equity to carry its credit risk. A purely intermediary financing company can use a simplified 2% after-tax return on financed assets, but must disclose this in its tax return. A new circular L.I.R. 56/2 - 56bis/2 of 13 April 2026 sets out the OECD Pillar One Amount B approach for baseline distribution activities, for financial years opened from 1 January 2025.

No special penalty for missing transfer pricing documentation was found. The general rules apply: a surcharge of up to 10% of the tax for a late return (paragraph 168 AO), periodic penalty payments to force a response (paragraph 202 AO), and late payment interest. A CbC failure can be fined up to EUR 250,000 (CbC law art. 3). Pillar Two fines are up to EUR 250,000 for the GIR and EUR 5,000 for registration or notification failures.

The Pillar Two law of 22 December 2023 applies the IIR and the domestic top-up tax (QDMTT) to fiscal years starting on or after 31 December 2023, and the UTPR to fiscal years starting on or after 31 December 2024. Each Luxembourg entity must register, file the GloBE Information Return (GIR) or notify who files it abroad, and file a top-up tax return, all through MyGuichet.lu. These are due 15 months after year end, or 18 months for the transition year, and never before 30 June 2026. Top-up tax is payable one month after the return is filed.

The corporate income tax return (Form 500) is due 31 December of the year after the tax year. Luxembourg gives no automatic extension, but the tax office can extend on a reasoned request. Interest deductions are capped at the higher of 30% of EBITDA and EUR 3m (art. 168bis LIR). Advance rulings are possible under paragraph 29a AO. Luxembourg is a party to the European Convention on the Calculation of Time-Limits (Basel, 1972) since 1985: when the last day of a time limit is a Saturday, Sunday or public holiday, it moves to the next working day.