The swell of rumours, conjecture, and concerns surrounding Britain’s exit from the EU has, in the eight months since Article 50 was triggered, ebbed somewhat. Though many questions still remain on the pending negotiations, financial companies in London have known since last year that Brexit will change their ability to do business in the EU. As a result, hubs within the EU like Ireland, Germany, and Luxembourg have been vying for the attention of these firms—and now, one year after the Brexit vote, companies have begun making decisions.

From the beginning, Ireland has been a contender, sharing a language with the UK and many of its legal aspects, as well as having an attractive fund framework. However, Luxembourg has been mentioned in the same breath—notably by Standard Life CEO Keith Skeoch, who, CNBC reported, specified these two countries as top options for asset managers. By the latest count, there are 11 companies moving house to Ireland, 10 to Germany, and 4 to the Netherlands.

And 24 to Luxembourg.

There are perhaps many reasons for this. Ireland does speak Britain’s language, but that language happens to be the international tongue of business—and is thus, the core language spoken in Luxembourg’s finance industry, whose widespread proficiency in German and French adds extra accessibility to those markets. And while Dublin’s fund toolbox is attractive, Luxembourg’s is at least as alluring—and its Government has made it clear that this will not change. Just last year they introduced a new vehicle, the Reserved Alternative Investment Fund (RAIF), to meet customer demand for less supervision and a faster time-to-market. Again, to support these comments with numbers: Luxembourg is the second largest fund hub in the world, second only to the United States, a country whose population is 500 times bigger.

Luxembourg has also taken its own approach to attracting firms from London. Due to its size, the Grand Duchy must consider quality over quantity. In fact, having large insurance companies, fund houses, and banks putting their entire headquarters in Luxembourg’s capital city—population 100,000—wouldn’t be sustainable. So, instead, led by Finance Minister Pierre Gramegna, the country has asserted itself as a partner to London, rather than a replacement. Why not move a core part of your workforce to Luxembourg, argues Mr Gramegna, rather than the entire cohort? This may have played well with Britain-domiciled companies, whose employees probably don’t relish leaving their UK homes.

A key issue to moving part of a company is, of course, substance. Companies should know that there is a wealth of guidance out there on this topic, substance being central to this post-crisis zeitgeist.

And since we are discussing the merits of Luxembourg as a finance hub, some of the main talking points—industry veterans will be well-acquainted with them already—must be mentioned: Luxembourg has a AAA stability rating; its sovereign debt is 22.1% of its GDP and saw growth in 2016 by 3.7%; it has a highly-skilled and multilingual workforce; it is a leading European financial centre (both for cross-border fund distribution and cross-border insurance and reinsurance activities); and finally it has a predictable and competitive legal, tax, and regulatory framework.

To top it all off, you can get Bus 16 from the airport to the business district of Kirchberg in about 7 minutes. Dublin Airport to the city centre is, so I hear, up to an hour in traffic.

Website: https://home.kpmg.com/lu/en/home.html

Written by Christophe Diricks & Axel Butaije, KPMG Luxembourg 

Running a cross-border business isn’t exactly like sailing down a peaceful river… perhaps it’s more like crossing an ocean full of dangers. However, on the other side may be a land of opportunity. New regulations, political trends, and business restrictions populate this ocean of challenges, but the wind of new technologies is picking up too, offering new paths across. And every good sailor knows that wind can be a fearless enemy but also a powerful ally, if you know how to harness it.

Disruptions to the business environment have been many, recently, like new reporting obligations (FATCA, CRS, and country-by-country reporting) or the new level of transparency that the Base Erosion and Profit Shifting (BEPS) action plans require. These changes may lead to a paradigm shift on how businesses deal with tax authorities.

In such a context, new technologies have (and will keep having) major impacts on how business is done—on one hand, negatively, by for example turning sensitive information into publicly available data, but, on the other hand, positively, by helping you meet the new requirements which ultimately keeps you competitive.

In this article, we will examine recent tax developments in private equity, real estate, and debt/hedge funds (so-called alternative investment funds) and discuss how new technology can be your best ally in navigating these changes.

Following several crises in the financial sector over the last decade, governments have put more pressure on companies (and to some extent individuals) by verifying their compliance with new international requirements, as well as by ensuring that they pay their fair share of taxes. Tax authorities have furthermore been performing tax audits based on information available via search engines (like Google), public online trade registers, and social networks (like LinkedIn, Facebook, or Twitter). This atmosphere of high-tax pressure has engendered new tax audit methodologies which look not only at a company’s tax returns/accounts but which also verify all the publically accessible information that tax authorities might be able to access.

Companies are thus asking themselves how they can comply with the new substance, oversight, and documentation norms in a cost-efficient manner. It could be hard to determine whether your fund platform in Luxembourg or Ireland has enough substance to benefit from tax treaties and directives under the new standards, but the BEPS Action 6 recommendations and information on non-CIVs offer guidance on this. Basically, they mention two pillars: infrastructure and human capital.

Infrastructure in terms of substance might sound obvious, but it could be worth revisiting. Broadly speaking, infrastructure comprises all the tangible fixed assets necessary to running your business like having a dedicated furnished office space, but also less tangible elements like your IT system or personalised email address or domain.

The substance definition of human capital is maybe a little less straightforward. Generally, by “human capital requirements,” it should be understood that you must have a task force appropriately qualified to run the business and to ensure that there is proper oversight over activities both performed and delegated. In addition, simply having the human capital is not enough anymore: the qualified workforce must be involved throughout the whole process of the (alternative) investment.

As industry members know, it is currently common for deal teams to be located in the country (or countries) of investment, and for investment funds and holding platforms to be in financial centres such as Luxembourg or Dublin for Europe, Singapore for Asia, or New York for the US.

However, deal teams are only a link in the long chain of the investment transaction, and fund management platforms (including special purposes vehicles) in Luxembourg or Dublin must have a more and more important role to play in those transactions:

• Prior to the investment, the deal team(s) must inform the fund management platform of the intention to invest.
• During the transaction, the fund management platform must have sufficient information to assess the profitability/viability of the investment, so it can raise a red flag when needed.
• Finally, at the investment’s “end-of-life” phase, i.e. when the investment is to be disposed of, the fund management platform should be in a position to determine which of the proposed exit options is the most appropriate so it can ensure that all the efforts made throughout the process have not been made in vain.

Having an experienced management team to review, approve, and monitor investments is also one of the key functions of the alternative investment fund manager (AIFM). Having an AIFM means that strategic decision-making abilities and management have to be performed in-house, with sufficient substance, people, and systems to effectively manage the overall operations.

We can therefore see a convergence between the AIFM Directive and the OECD’s BEPS Action 6 in the level of substance, responsibility, and activity required. This is probably why, following Brexit, the biggest alternative investment funds managers have decided to transform their Luxembourg or Dublin investment fund and holding platforms into AIFM-compliant platforms.

So management teams in Luxembourg or Dublin must play their roles seriously during the whole lifecycle of the investment—however, in instances of tax audit, this is not enough. The teams should also be able to demonstrate (through documentation) that all the appropriate functions are being effectively performed.

Management teams, in order to adequately and promptly document the oversight of the business, need efficient IT dashboard tools that allow them, in one click, to access the compliance status of their entities. They must furthermore be able to perform risk management and compliance duties (according to FATCA/CRS, MIFID, AIFMD, and any other local requirements) smoothly and efficiently. Tailor-made software solutions already exist in this area.

Looking ahead, artificial intelligence (AI), robotic process automation (RPA), blockchain and digital ledger technology (DLT) will shape how alternative investment managers operate and even how investments are structured. RPA, for example, will enhance productivity, reduce costs, streamline processes, and limit operational errors. It will affect many routine tasks with limited added-value such as invoice processing or investor reporting, taking them over from human workers, who in turn will focus on more interesting and dynamic functions such as review, approve, and monitor investments

The oversight is becoming an increasingly important activity within the alternative investment fund industry notably because of the regulatory requirements for the AIFM conducting officers and the tax international developments (BEPS) obliging directors to understand the business into which they invest.

AIFMs understand the importance of creating strategies around tax technology. They are pursuing investments in these areas in order to transform the tax function into a strategic business aspect of the organisation. Now is the time to assess where you are in terms of substance and technology, where you want to go, and how to get there.

Written by Philippe Neefs, KPMG Luxembourg Transfer Pricing Leader

Since 1 January 2015, Luxembourg’s transfer pricing regime has been based on article 56 of the Luxembourg Income Tax Law (LITL), which introduced the arm’s length principle into local Luxembourg law. In addition, the Luxembourg tax authorities could also refer to article 171 of the Abgabenordnung, modified by the Law of 19 December 2014, which essentially states that taxpayers should be able to provide transfer pricing documentation sustaining the arm’s length character of all intercompany transactions.

On 27 December 2016 article 56bis was introduced, together with the publication of a new transfer pricing circular for companies principally performing intra-group financing activities. This new article, applicable as from 1 January 2017, gives taxpayers and Luxembourg tax authorities more guidance on how to apply the arm’s length principle in the context of a wider value chain analysis. It focuses on the comparability analysis based on the OECD’s five comparability factors approach. The comparability factors to be taken into account are the following:

1. Contractual terms of the transaction: the contractual terms should be found not only in the legal documentation, but should also be reflected in the accounting statements.
2. Functional analysis: a wider value chain analysis, as well as the ability to control the risks, should be outlined.
3. Characteristics of goods and services: differences in quality or availability of a product or a service should be considered.
4. Economic circumstances: product life cycle, market size, and the extent of competition should be taken into consideration.
5. Business strategies: risk diversification and innovation strategies that have a possible impact on transfer pricing should be examined.

The commercial rationale behind each intercompany transaction is also of outmost importance. If the commercial rationale is lacking, then a transaction could be disregarded. This has a critical impact as taxpayers must now be prepared to be able to document the commercial rationale as part of the transfer pricing documentation. Attention will need to be paid to pre-structuring documentation. Therefore a description of the Luxembourg value chain should take any no-tax reasons into account.

The circular published on the same day as article 56bis clarifies the transfer pricing rules applicable to entities principally performing intra-group financing activities (Circulaire du directeur des contributions LIR n° 56/1-56bis/1 of 27 December 2016). The scope of the application of the circular remains the same as under the 2011 transfer pricing circulars previously applicable in Luxembourg. Notably, it applies to all entities realising intra-group financing transactions, while holding activities remain out of its scope. The definitions of “intra-group financing transactions” and “associated enterprises” remain unchanged.

In this new circular, strong emphasis is put on the analysis of the risks assumed by the companies. In that regard, different factors need to be taken into account such as the solvency of the borrower, the potential guarantees for specific financing transactions, the costs in relation to the financing transactions, and the actual value of the underlying assets.

The circular further provides that if a company has a similar functional profile to the entities regulated under EU Regulation n° 575/2013 that transposes the Basel Accords, and the company has an amount of equity complying with the solvency requirements under this regulation, then it is considered to have enough capital to support the risks assumed. Moreover, as a safe harbour, it is considered that such a company complies with the arm’s length principle if its 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 this 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 capital 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 €2 million) that could be derived from the application of the 2011 transfer pricing circulars.

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

1. The members of the board of directors, or the managers empowered to engage the entity in particular, must be residents of Luxembourg; the majority of the board members should also 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 personnel 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 latter item still under debate.
3. The entity must not be considered a tax resident of a foreign jurisdiction.

The circular additionally provides for a measure of simplification, which a taxpayer can opt for 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.
3. The company fulfils the substance requirements (as outlined above).

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

The circular specifies 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. It further stipulates that any Advanced Pricing Agreement issued before the entry into force of article 56bis LITL should not be binding by the Luxembourg 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 does not have the so-called organisational and economic substance would be considered a conduit entity and that this information can be exchanged spontaneously with concerned jurisdictions. It can be anticipated that tax audits in source jurisdictions may be initiated and that the beneficial owner status of the Luxembourg entity may be questioned.

In light of these developments, previous Advanced Pricing Agreements and defensive transfer pricing documentation need to be reviewed and possibly updated.

Additionally, on 27 December 2016 the law on non-public country-by-country (CbC) reporting transposing the EU Directive 2016/881 of 25 May 2016 into domestic law was published. This measure reflects OECD/G20 BEPS Action 13. On 12 July 2017 the Luxembourg tax authorities acknowledged and explicitly referred to the OECD’s guidance on the implementation of the CbC reporting. Nevertheless, it is important to note that Luxembourg has not yet implemented any measures that would transpose the Master File and the Local File requirements under OECD/G20 BEPS Action 13. The author hopes that Luxembourg will transpose these measures into its domestic law in order to fully comply with the multi-tier transfer pricing documentation standard. This would further confirm Luxembourg’s commitment to the greater transparency that is required today.

Notably, CbC reporting requirements apply to multinational enterprise (MNE) groups whose total consolidated group revenue exceeds €750 million (or an amount in local currency approximately equivalent to €750 million) during the previous fiscal year.

As a result of this legislation, constituent Luxembourg entities must notify the Luxembourg tax authorities as to whether they are an ultimate parent entity, surrogate parent entity, or constituent entity. If the constituent entity is not the reporting entity that will be filing the group's 2016 CbC report, they must provide the identity and tax residence of the actual reporting entity to the tax authorities. MNE groups with a fiscal year-end in 2016 had to provide this notification by 31 March 2017 (instead of 31 December 2016, which was originally the deadline). This notification procedure is performed online on a specifically dedicated website of the Luxembourg tax authorities. Luxembourg's new law requires the first CbC reports to be filed for fiscal year 2016 within 12 months of the last day of the reporting fiscal year of the group (e.g. 31 December 2017 if the 2016 accounting year of the MNE group ends on 31 December 2016). Failure to do so may entail a fine of up to €250,000!

As a conclusion, the above mentioned measures are welcome on the Luxembourg market, as they provide additional guidance on the application of the arm’s length principle. The new article 56bis LITL can be seen as a transposition of OECD/G20 Base Erosion and Profit Shifting (“BEPS”) Actions 8-10. These developments mirror international and European ones, putting Luxembourg on a level playing field. The author, however, anticipates an increase in tax audits and would advise the preparation of agile transfer pricing documentation. In this respect, readers must ask themselves the following questions with respect to their Luxembourg investment structures:

• Is your company engaged in any intercompany transactions (e.g. intercompany loans, management fees, license fees, etc.)?
• Are your intercompany transactions covered by a legal arrangement/part of your transfer pricing policy and are these agreements also reflected in your accounting system?
• Is there any transfer pricing policy available on the group/local level that covers all your intercompany transactions?
• Have you entered into any Advance Pricing Agreements with the tax authorities and have you checked whether the facts are still applicable?
• Does your group qualify for the country-by-country reporting requirements?

Jose C. Garcia is the CEO of Carlisle Management Company. After graduating from George Mason University my MBA, Jose began looking at different options within the Washington DC investment banking community, which is where he first encountered the life settlement industry. The unique quantitative nature of the industry, paired with its practically untapped potential managed to peak Jose’s interest. There he found an asset class, built on the foundation and valuation methodologies of the Life Insurance Industry, with a minimally correlated investment performance in a market that was still inefficient, it was like a dream come true. Jose began working for a small DC firm that specialized in the origination and structure side of the business. Over the next few years, he helped grow the company to an industry leading position all the while collecting an amazing set of relationships within the space. Fast forward nearly 20 years, and he’s overseen the purchase of more than US $5 billion in life settlements and helped a myriad of companies and institutional investors build custom tailored investment products that meet their specific needs.

 By 2008, the financial crisis was underway, and the lessons being learned meant that all asset classes, his company’s included, were under enormous pressure to improve the transparency and security of our products and structures. It was apparent that if you wanted to retain the confidence of your clients and continue to grow a healthy business, one needed to do so in the most reputable and well-regulated way possible. After looking around the world for the most appropriate places to conduct business, the company discovered Luxembourg and knew that this would be right place for them. Luxembourg’s stringent regulatory environment and plethora of top level service providers meant that Jose and his team could build an organization with a reputation for excellence, both in product development and investor services. Since they settled in Luxembourg, Carlisle has kept very busy designing, developing, implementing and managing investment vehicles within the life settlements space for our global base of clients. Here Jose tells us more about the company, the investment fund landscape in Luxembourg and the recent implementation of AIFMD.

What’s the current investment fund landscape in Luxembourg?

 Luxembourg continues to the one of the fastest growing international financial centers in the world. The last 10 years have yielded a very appealing investment environment supported by solid regulatory structures and a stable political setting. Luxembourg has always been regarded as a front runner in terms of the evolution of their investment and banking regulatory standards and legal framework. Its reputation as the leading investment fund management hub across Europe remains unchallenged. Luxembourg domiciled funds are distributed in over 50 countries worldwide with over 70% of foreign funds distributed in Hong Kong and Japan originating in Luxembourg, according to the ALFI (Association of the Luxembourg Fund Industry).

In addition to the regulatory environment, Luxembourg provides an advantageous environment, in many instances, from double income tax treaties with a multitude of countries to many investment and corporate structures to achieve each objective. Another large appeal to Luxembourg is the plethora of top level service partners with physical presences here in Luxembourg. From the large accounting firms to the world’s most reputable administrators and custodians, Luxembourg has no shortage of viable candidates for every aspect of the financial operations process.

Looking into the near future, what do you anticipate for the sector?

With the recent implementation of AIFMD, regulation across Europe has become even more robust. As a regulatory leader, Luxembourg was amongst the first European members to implement the new regulation which increases oversight across several functions such as compliance, risk management, and KYC/AML, allowing investors worldwide to gain confidence in this Fund center. Features like this and the country’s pioneering attitude, keep Luxembourg as a leading Investment Fund centre.

In addition, due to Brexit, we have already seen several firms transfer part of their UK operations. Recently there were articles published that financial giants, like Blackstone have chosen Luxembourg for their new European hubs, clearly sending a message to the financial community that Luxembourg is well positioned and poised for further growth.

What has been happening with Carlisle since we last spoke in July 2016? Are there any exciting projects or achievements that you’d like to share with us?

 Carlisle has continued its stellar performance track record while maintaining high-quality standards and commitment to transparency. As the Life Settlements industry evolves and becomes more efficient, Carlisle, as investment manager, must continue to lead the way and adapt to new circumstances. Thanks to our relationship network, our efforts in stimulating supply are producing positive results. In addition, demand in this growing as well, which will allows us to enjoy above average returns for a longer period of time.

Due to the recent financial crisis and the current financial market stagnation coupled with increasing interest rates, many investors are concerned about an upcoming market correction. Carlisle is in the process of launching a number of closed-end funds, aimed at further minimizing correlation to traditional financial markets and economic indicators. Many of our clients have demanded this solution and Carlisle has raised to challenge. In the fall of 2016 we expect to launch the LTFG Absolute Return Fund I, on a closed-end format, which will provide protection against future market corrections or financial crises.

How would you evaluate your role and its impact over the last year or so?

I see my role as a corporate and industry leader. My role is to provide the strategy for Carlisle and lead the charge to achieve our objectives, while furthering the efforts and the message of the Life Settlements Industry. I have the benefit having contact with many of our investors, other industry leaders, service providers and regulators, hence providing me with several points of view, which uniquely positions me to guide the company. For several years now, I have been seeing that life settlement supply and growing concern for another financial correction would play an important role in investor behavior. Supply, because many funds are beginning to hit capacity and corrections because the stagnation of financial markets along with increasing interest rates are changing investor psyche and behavior. For this reason, in the last year, we have begun working with several companies in the US on direct to consumer marketing campaigns in order to increase senior education and stimulate supply. Finally, due to the growing concern investors have, Carlisle is now launching closed-end funds, in order to minimize correlation on traditional financial markets, which will provide investors with a refuge to weather any approaching financial storms.

What challenges would you say you and the firm encounter on a regular basis? How are these resolved?

Most of the challenges we encounter mostly deal with regulatory changes, such as AIFMD implementation or FATCA, and supply restrictions in the life settlements market. Regulation is something outside our control, and all we can do is meet it with an open mind and implement all necessary functions to comply. In reference to supply within the life settlements market, we are a industry leader can help lead the way to increasing consumer education and awareness. Through participation in industry events, and direct to consumer marketing campaigns we can make a difference and improve supply in the market. Determination and consistent effort, is key to ensuring that our efforts have a positive return.

What further goals are you currently working towards with the company and do you have a particular vision for the future of its services?

The main goal of 2017, aside from our continued to commitment to our investors and industry, is to launch the LTGF Absolutely Return Fund I, which will provide investors with a way to allocate to the life settlements space through a closed-end format. Many investors have voiced their concerns over a new financial recession and Carlisle has heard the message loud and clear. The Closed-End Funds will provide investors with a cash-in, cash-out investment vehicle where all incentives are aligned, while providing the same level of quality and transparency that our investors have come to rely on.

In addition, in 2017 a group of industry members launch the Alliance for Senior Health Care Financing, as a coalition to raise awareness of life settlements within the Senior community. Life Settlements – the sale of an in-force life insurance policy for a market value return – is an immediate way for seniors to generate resources to pay for their long-term care needs. Life insurance policy owners have a lawful, protected property right to sell their life insurance policies for a fair market return in order to meet the increased cost of health care and retirement. Carlisle has joined this coalition as a founding member, in order to help improve the life settlements industry.

What lies on the horizon for you and your company in the next 12 months? 

 The next 12 months are poised to be another monumental year for Carlisle. As exposure and investor interest grows, we plan to use the momentum to bolster our already formidable footprint in the marketplace and form new strategic partnerships that will enforce our firms forward thinking philosophy and help us remain at the forefront of the industry. Direct to consumer marketing campaigns will continue to increase senior education and awareness, which will provide us the necessary supply to continue growth. Launching a series of closed-end funds will meet our investors’ demands and allow us to reach new investment community sectors. It is our intention to continue playing a strong leadership role in the life settlements industry. The market continues to evolve and Carlisle is extremely well positioned to take advantage of upcoming trends and opportunities.

Website: http://www.cmclux.com/

It has been now more than a year since the Organisation for Economic Cooperation and Development (OECD) issued its recommendations addressing base erosion and profit shifting (BEPS). Following this initiative, Europe has embraced the BEPS Project and has passed various directives at a rapid pace, thus actively contributing to changing the international tax landscape. One of the biggest milestones reached so far is the Anti-Tax Avoidance Directive, which was passed by the Economic and Financial Affairs Council (ECOFIN) in July this year.

The measures of this Directive are expected to have a significant impact on the tax landscape in Europe. Most EU countries are thus already reforming their taxation systems and proposing new tax incentives in compliance with the latest standards.

Luxembourg has not escaped this trend and is adapting its tax framework to both the OECD-BEPS standards and the new EU requirements, while also ensuring that it remains attractive. Luxembourg’s recent announcement of a progressive decrease in the corporate income tax rate, from 21% to 18%, marks one of the first steps towards remaining competitive, and will lead to a global income tax rate of circa 26% in 2018. The government is already considering a further decrease in the corporate income tax rate, but a final decision will not be taken before an assessment of the effects of the BEPS Project and related measures on the State budget is made.

Bearing in mind the above developments, a key element of the country’s competitiveness undoubtedly remains its economic strength and stability. Major rating agencies have confirmed the country’s 'AAA' rating with a stable outlook. And it is further expected that Luxembourg will continue to experience growth superior to the European Union and Eurozone average, which is particularly noteworthy given the current changes in the international corporate tax framework. Additionally, in the context of Brexit, Luxembourg is well positioned compared to other EU countries as a leading centre in Europe for investment funds (in second place worldwide after the USA), and investors can rely on its long-standing business-friendly environment as well as on fewer bureaucratic and administrative hurdles.

Looking into the future, it is clear that the Luxembourg tax landscape will continue to evolve to keep pace with international tax changes. In the short term, the main trends that are likely to remain dominant are a continuing and increased focus, by the Luxembourg and other local tax authorities, on transfer pricing and substance requirements. This has already resulted in the recent release of a new bill in Luxembourg providing further guidance on applying the arm’s length principle from 2017 onwards, in line with the work on Actions 8-10 of the BEPS Project (on ‘Aligning Transfer Pricing Outcomes with Value Creation’). The bill outlines the legal framework for a comparability analysis and emphasises that the arm’s length principle must be applied to all controlled transactions. Another trend that will inevitably derive from all these evolutions, and from tax transparency and automatic exchange of information becoming the new normal, is the increase in tax audits and cross-border tax disputes.

These international developments will heavily affect multinational groups, which face the challenge of understanding the changes, delineating the unique ways in which their organisations are affected, and mapping out the best way to respond. Companies must therefore start reshaping their structures and business models, where appropriate. They must also ensure that they have adequate transfer pricing and supporting documentation to outline how they have determined the arm’s length principle for their intra-group transactions in the context of a wider value chain analysis, and to demonstrate that they have the right economic substance and business rationales underlying their transactions. This will definitely be key in a world in which tax authorities worldwide have, more rapidly than ever, greater access to all taxpayers’ data.