New article 56bis LIR and Circulaire LIR n°56/1-56bis/1 : Threat or Opportunity?

New article 56bis LIR and Circulaire LIR n°56/1-56bis/1 : Threat or Opportunity?

by Philippe Neefs, Partner, KPMG Luxembourg

On 22 December 2016 the Luxembourg Parliament voted the new article 56bis of the Luxembourg Income Tax Law (LITL). This provision gives taxpayers and tax authorities more guidance on how to apply the arm’s-length principle. The new article can be seen as a transposition of the late 2015 OECD BEPS reports (actions 8-9-10) into national law.

Below we highlight the most important implication of that new provision which encompasses the OECD five comparability factors approach.

Par.7 of the new Art 56bis (“..transactions between the parties can be disregarded for transfer pricing purposes, if [part of] the transaction does not possess the commercial rationality of arrangements that would be agreed between independent parties…”) will impact future transfer pricing work because a taxpayer will always have to be prepared to be able to document the commercial rationale behind intercompany transactions as part of its transfer pricing documentation. The legislator did not take into account the caveat given by the State Council, where this provision could only be applied exceptionally.

As an example of “non-recognition”, we can consider the case where a guarantee on a loan is put in place between related entities and that the Luxembourg tax authorities consider that an independent party would never enter into this contract as a guarantor and that there is a lack of commercial rationale for such transaction. This could alter the credit rating of the entity for transfer pricing purposes, impact the arm’s length interest rate to be paid and finally the remuneration to be left by the Luxembourg intra-group financing entity. Attention will need to be paid for this in pre-structuring documentation. Therefore, a description of the Luxembourg value chain will be worth taking into account any non-tax reasons.

On 27 December 2016, in light of the above mentioned article, the Luxembourg Tax Authorities published a new Transfer Pricing Circular aiming at clarifying the transfer pricing rules for companies principally performing intra-group financing transactions (Circulaire du Directeur des contributions L.I.R. n° 56/1 – 56bis/1 du 27 décembre 2016).

In this respect, Luxembourg is adapting its legal framework to take into account the latest international and European evolutions. As stated on the official website of the Luxembourg Government, the new Circular follows the discussions between Luxembourg and the European Commission’s DG for Competition.

The scope of application of the new Circular remains the same as under the 2011 Transfer Pricing Circulars. Notably, it applies to all entities realizing intra-group financing transactions, while holding activities remain out of its scope.

In this new Circular, strong emphasis is put on the analysis of the risks assumed by the companies performing the intra-group financing transaction under review. In that regard, different factors will need to be taken into account such as the solvency of the borrower, the potential guarantees for specific financing transactions, the costs in relation with the financing transactions or the actual value of the underlying assets.

The Circular further provides that if the companies have a similar functional profile to the entities regulated under the EU Regulation n° 575/2013 that transposes the Basel Accords and such companies have an amount of equity complying with the solvency requirements under this Regulation, then it is considered that these companies have enough capital to support the risks assumed. Moreover, as a safe harbor it is considered that these companies comply with the arm’s length principle if their remuneration corresponds to a return on equity equal to 10% after taxes. In practice, it is not expected that many Luxembourg companies will fall into the above-described category due to the particular nature of the required functional profile.

All other companies should perform an analysis to determine the necessary capital at risk using the widely accepted methodologies in this area. These companies must have the financial capacity to assume such risks. The level of capital at risk should correspond to the functional profile under review, meaning that the required equity at risk should decrease when the risks borne become more limited. It must be noted that there is no reference anymore to the minimum required capital at risk of 1% of the financing volume (capped at EUR 2 million) that could be derived from the application of the 2011 Circulars.

Furthermore, the Circular provides that in order to be able to control the risks (i.e., decision-making capacity), the company performing the intra-group financing transaction should comply with the following substance requirements:

  1. The Luxembourg residence of the members of the board of directors or managers empowered to engage the entity in particular, the majority of board members should be Luxembourg resident or, if non-Luxembourg resident, should be taxable for at least 50% of their income (listed in the Circular) in Luxembourg;
  2. The company should have qualified employee(s) to control the performed transactions. However, the company could outsource some functions that do not have a significant impact on the control of the risks. This requirement will certainly be debated a lot in the near future;
  3. The fact that the entity is not considered as a tax resident of a foreign jurisdiction.

Linked to the above article 56bis, the Circular provides that if one or several transactions cannot be observed between independent parties and no commercial rationale could be identified, then such transactions should be disregarded in order to comply with the arm’s length principle.

The Circular provides in addition for a measure of simplification for which a taxpayer can opt should the following conditions be fulfilled:

  1. No Transfer Pricing study has been prepared;
  2. The intra-group debt receivables are financed by intra-group debt payables; and
  3. The company fulfills the substance requirements (as outlined above).

It will be considered that such companies comply with the arm’s length principle if their remuneration corresponds to a return on the financed assets of at least 2% after taxes. These cases will be subject to the information exchange process.

The Circular provides that it remains possible to obtain an advanced pricing agreement, based on the facts and circumstances of each case, if the conditions outlined in the Circular are respected.

The Circular stipulates that any advanced pricing agreement issued before the entry into force of article 56bis LITL should not be binding upon the Tax Authorities as from 1 January 2017, for the fiscal years following 2016.

Although it is not indicated, it can be interpreted that a Luxembourg entity carrying out an intra-group financing activity that has not the so-called organizational and economic substances would be considered as “conduit” and that Luxembourg may exchange spontaneously that information with the debtor’s jurisdictions. It can then be anticipated that a tax audit in those jurisdictions may be initiated and that the beneficial ownership of the Luxembourg entity will be questioned.

A review of the previously filed advanced pricing agreements, as well as past defensive Transfer Pricing documentation, in light of this revised legal framework will need to be carried out.

The conclusion would be that Luxembourg taxpayers will need to develop agile documentation (any change provides opportunity) in order to fit with these new developments, where Luxembourg certainly wants to be in a level playing-field situation.

– Lastly, please do not forget the non-public country-by-country (CbC) reporting transposing the EU Directive 2016/881 of 25 May 2016 into Luxembourg law. E-Notifications about the reporting entities for MNE groups having a fiscal year-end in 2016 (and a fiscal exercise starting as of 1 January 2016) must be provided on an exceptional basis no later than 31 March 2017 (instead of 31 December 2016 as initially foreseen in the Law).

Above all, I wish you all the best for 2017, which certainly will be an inspiring and challenging year for all of us!

Luxembourg taxpayers will need to develop agile documentation (any change provides opportunity) in order to fit with these new developments

Philippe Neefs

Partner, Head of Private Equity

KPMG in Luxembourg

Guest article: Quick guide on how to set-up a Luxembourg SIF (Specialised Investment Fund)

Guest article by Laurent Hengesch, Head of Business Development at Carey Group

Quick guide on how to set-up a Luxembourg SIF (Specialised Investment Fund)


The following sections will give you a short overview on how to set up a SIF:

Drafting the SIF prospectus| The very first step to set-up a SIF will be to draft the SIF prospectus. In order to achieve this first milestone, there are different sub-steps to be undertaken.

Contract a Luxembourg law firm to draft the prospectus and the articles of association. A Luxembourg lawyer shall be appointed to draft and or review the fund legal and contractual documentation and file such document to the Luxembourg Financial Authorities (the ‘CSSF’).

Responsibility: Initiator of the SIF with the support of Carey S.A.

Provide the different information required for the drafting of the SIF prospectus. Such information relates mainly to a) the SIF’s investment strategy, restrictions and risk guidelines, b) operational set up of the fund (below).

The SIF will need to appoint the following providers:

            • a central administration agent located in Luxembourg (responsible for the SIF domiciliation, net asset value computation and accounting, the regulatory reporting, the registrar and transfer agent function as well as the day-2-day administration) like Carey S.A.
            • a custodian bank located in Luxembourg responsible for the safekeeping of the SIF’s assets.
            • an independent auditor.

The board members of the SIF shall also be selected. A minimum of 3 board members shall be planned including local directors (such local directors may be either provided by Carey S.A. or selected among local independent directors). The SIF’s board members will have to obtain CSSF approval (such process will occur in the same time as the below filing process, on the basis of CV justifying the expertise in the specific investment field of the SIF, criminal records, etc.).

Step I Summary

            • Expected time line: Between 4 to 6 weeks.
            • Expected cost: From EUR 20,000 excluding taxes (Such costs relates mainly to the legal work and shall include the filing process to the CSSF as well). These set-up costs may be amortised within the fund over a period of 3-5 years.
            • Parties involved: The initiator of the SIF, the contracted law firm and a local coordinator (such role shall be undertaken by Carey Group).

Week I | Law Firm to be selected | Main features of the prospectus being discussed

Week II-III | Selection process of SIF providers

Week IV-VI | Release of the draft Prospectus to be filed

Filling of the SIF prospectus to the Luxembourg Financial Authorities (the “CSSF”)

Once the drafting of the SIF legal and contractual documentation have been finalised and all required filing documents have been made available, the contracted law firm will file the SIF documentation to the CSSF for authorisation.

Note: the prospectus should only be filed together with the other documents composing the application file: articles of association, main services agreements, subscription agreement, CV and affidavit of the managers, etc. 

The CSSF will issue a first feedback and may ask questions/additional information on the draft prospectus. Once the different outstanding points have been cleared, the CSSF will issue an oral and then written confirmation of its agreement (formalised by the prospectus being granted a written CSSF VISA).

Responsibility: The contracted law firm with the support of Carey S.A

Step II Summary

            • Time line: Between 4 to 6 weeks (depending on the number of additional information requested by the CSSF), this can also take up to several months.
            • Expected cost: Legal fees are included in step 1 provision + CSSF filing duty from EUR 3000 (stand alone SIF).

note: in addition to the initial filing duty, an annual duty of the same amount (EUR 3,000/EUR 6,000) shall be due to the CSSF

            • Parties involved: The contracted law firm, the initiator of the SIF, and a local coordinator (such role shall be undertaken by Carey S.A.).

Week VI | Filing of SIF Prospectus

Week VII | Preliminary feedback from the CSSF

Week IX | Filing of any additional information required. Approval received from the CSSF.

Incorporation Process

Once the SIF documentation has been approved, the SIF will be incorporated through an extraordinary general meeting of the shareholders in front of a Luxembourg Notary.

Responsibility: The contracted law firm and the central administration agent (Carey S.A).

Step III Summary

            • Expected time line: Between 2-3 days.
            • Expected cost: Legal fees are included in step 1 provision. + notary costs about EUR 3,000 to 5,000.
            • Parties involved: The contracted law firm, the notary, the central administration and the Company’s shareholder(s).

Week X | Management of the Extraordinary General Meeting of the Shareholder

Initial Closing

Upon fulfilment of the above steps, the SIF will be up and running. A first board of directors meeting will be held asap in order to approve and endorse the Prospectus, define and validate the initial closing period of the SIF, formally appoint the different providers of the SIF and take any appropriate resolutions regarding the day-2-day operations of the fund.

Responsibility: The board of Directors of the SIF and the central administration agent.

Indicative Timeline Summary

Week 1 | Law Firm to be selected |Main features of the prospectus being discussed

Week II | Selection process of SIF providers

Week IV-VI | Release of the draft Prospectus to be filed

Week VI | Filing of SIF Prospectus

Week VII | Preliminary feedback from the CSSF

Week IX | Filing of any additional information required. Approval received from the CSSF

Week X | Management of the Extraordinary General Meeting of the Shareholder

Follow Laurent Hengesch’s on LinkedIn Pulse.

Guest article: RAIF – a new type of AIF is coming soon

Guest article:

RAIF: a new type of AIF is coming soon

Jacques Elvinger EHP

Jacques Elvinger, Member of LPEA

Over the last 12 months, Luxembourg industry practitioners, with the support of the Luxembourg government, have been designing the legal framework for a new type of Luxembourg alternative investment fund (“AIF“) managed by an authorised AIFM, and this project is nearing completion so that the legislative process can start imminently.

This new type of AIF, referred to in the working documents as reserved alternative investment fund (“RAIF“), has substantially the same characteristics (and flexibilities) as a SIF (1) -AIF, the main difference being that the RAIF will not be subject to the supervision of the Luxembourg supervisory authority (the “CSSF“).

Contrary to a SIF, there will be no need for CSSF approval for the creation and launch of a RAIF and, similarly, no authorisation will be required from any supervisory authority in the event of changes to a RAIF’s constitutional documents, information documents or other documents governing the functioning of the RAIF. Investors in a RAIF will thus not have the benefit of the increased investor protection which the supervision by a supervisory authority entails, as is the case with the SIF, but the timeframe within which a RAIF can be set up and launched will be more attractive from a time-to-market perspective.

Because the RAIF is an AIF managed by an authorised AIFM (based in Luxembourg or in another EU Member State), the AIFM will ensure that the RAIF complies with all requirements of the AIFMD. Indirect supervision of the RAIF is therefore ensured through the supervision performed on its AIFM by the latter’s supervisory authority.

In all other respects, the RAIF will have the same characteristics as a SIF-AIF, notably as regards the various different legal forms (corporate and contractual) which are available, no limitation as regards eligible assets or investment policies, the possibility to have multiple compartments and multiple classes, flexible subscription, redemption and distribution features and the tax regime of the taxe d’abonnement at the 0.01% rate (or nil rate in certain circumstances).

If a RAIF restricts its investment policy in its constitutive documents to investments in risk capital, it is not required to operate under the principle of risk spreading and it will be subject to the same tax regime that currently applies to SICARs. (2)

As the RAIF is an AIF managed by an authorised AIFM, it will have the benefit of the European passport granted by the AIFM Directive for marketing to professional investors in the EU.

Assuming the legislative process will take approximately six months, it can be expected that this new type of AIF will be available over the course of Q2 in 2016.

* Jacques Elvinger, Partner of Elvinger Hoss Prussen

Capital V #3

Capital V #3

The magazine of LPEA – 1H 2014


Mangrove Capital Partners: after Skype, Wix! – a Nasdaq IPO success

Interview with Jean-Marc Goy, CSSF

Interview with Guillermo Morales, GGM Capital


Is the Luxembourg Special Limited Partnership really so special?

Domiciliation – setting up in Luxembourg

Trends – the wisdom of Crowdfunding

Life in Luxembourg

Business woman – Betty Fontaine