On 12 October 2016, Budget Bill No. 7050 was submitted to the parliament. The most important fiscal measures are summarized below.
Arm's length principle
A new article 56bis will be included in the Income Tax Act (ITA), which codifies the arm's length principle.
The new article provides that companies have to determine an arm's length price for all transactions. It is specified that if a transaction is generally not concluded by unrelated parties, as such, it does not automatically mean that the transaction is not at arm's length.
Where companies have to base their pricing on a comparable transaction with similar economic characteristics, the comparability is determined by means of the following criteria:
|–||the identification of the commercial and financial relations between related companies and the determination of the important economic conditions and circumstances connected to this relationship to determine the exact transaction; and|
|–||a comparison of those economic conditions and circumstances determining a transaction between related companies, with those of comparable transactions on the free market.|
The relevant economic conditions and circumstances which have to be determined for the comparability include the following:
|–||the contractual terms of the transaction;|
|–||the functions performed by each of the parties to the transaction, taking into account assets used and the managed and assumed risks;|
|–||the characteristics of the property transferred, the service rendered or the engagement agreed;|
|–||the economic circumstances of the parties and the market in which the parties conduct their activities; and|
|–||economic strategies pursued by the parties.|
For the determination of the arm's length price, the most suitable method for the transaction concerned has to be used.
Real estate tax
The scope of article 4(3b) of the real estate tax (impôt foncier) providing for an exemption of associations, foundations and property funds acting for the common interest will be expanded to non-resident entities to bring this provision in line with EU law.
Collection of taxes
To bring the legislation in line with EU law, the provision that non-residents who want to establish in Luxembourg but do not own real estate in Luxembourg have to provide a guarantee for the payment of their taxes will be abolished.
The amount of the annual turnover for the application of the regime for small and medium-sized companies will be increased from EUR 25,000 to EUR 30,000.