Every Luxembourg company must price related-party transactions at arm's length and justify them on request. Financing companies need equity at risk and local decision-makers; a 2% after-tax return is the safe harbour for pure intermediaries. Routine services at cost plus 5% are accepted. Overpayments to shareholders are hidden dividends with 15% withholding. Formal master and local files are for large groups.
Transfer pricing applies to small groups too
Luxembourg's arm's length rule applies to every transaction between related companies, whatever their size: a loan from the family holding, a management fee from the parent, a royalty to a sister company. Large groups file master and local files; small groups need agreements and a short pricing rationale they can produce when asked.
Arm's length
Prices between related parties must match what independent parties would agree.
Financing companies
Equity at risk, substance, 2% after-tax safe harbour.
Low value services
Cost plus 5% is accepted for routine support.
15% withholding
Overpayments to shareholders are taxed twice.
The flows in a small Luxembourg group
| Flow | What tax inspectors check | Typical fix |
|---|---|---|
| Loan to a subsidiary | Rate, security, ability to repay, equity at risk | Rate benchmark, written terms |
| Loan from the shareholder | Excessive interest, debt-to-equity | Market rate, documented need |
| Management fees | Real services, cost base, mark-up | Cost plus 5%, timesheets, agreement |
| Royalties | Who developed the IP and where | Substance at the IP owner |
| Guarantees | Real benefit to the borrower | Fee only for explicit support |
In a small group, transfer pricing is rarely about complex models. It is about a signed agreement and a reason for the number.
Check your intra-group payments
Tick all flows that apply.
Check your intra-group payments in Luxembourg
Tick your flows and answer four questions. You get the documentation level and the risk points.
Arm's length applies to all related flows.
Equity at risk and local decisions.
Cost plus, documented.
15% withholding on the excess.
Transfer pricing in Luxembourg: frequent questions
Does a small Luxembourg company need transfer pricing documentation?
Every Luxembourg company must deal at arm's length and be able to show it on request. Formal master and local files are aimed at large groups; a 2023 bill sets the line at EUR 100 million turnover or EUR 400 million balance sheet.
What are the Luxembourg rules for intra-group financing companies?
The 2016 circular requires equity at risk matching the functions, and qualified staff and decisions in Luxembourg. A pure financing intermediary earning a 2% after-tax return on equity is accepted without further analysis.
What management fee mark-up is accepted in Luxembourg?
For low value-adding services, cost plus 5%, in line with the OECD simplified approach.
What is a hidden dividend in Luxembourg?
An advantage given to a shareholder through non-arm's length prices, such as excessive interest or fees. It is not deductible and carries 15% withholding tax.
Is interest deduction limited in Luxembourg?
Net interest expense above EUR 3 million is deductible only up to 30% of tax EBITDA, under the EU anti-avoidance directive.