As the different players of the Luxembourg traditional and alternative investment management industry enter into numerous domestic and cross-border related party transactions, they will be impacted by the new law.  Based on the law, they will need to make sure the prices on their related party transactions meet the arm’s length principle and will need to document the transfer pricing according to the OECD Guidelines. 

PwC Luxembourg organised a breakfast event on Tuesday 28 April 2015 to share the impact of the law for the Luxembourg traditional and alternative investment industry. This conference brought together a panel of PwC partners from Luxembourg, UK, Germany, Switzerland and Italy who explained the new Luxembourg transfer pricing rules and gave an overview of the recent transfer pricing trends and challenges across Europe.

Transfer pricing documentation

The new law confirms that the Luxembourg asset management industry will need to pro -actively document that they meet the “arm’s length” principle, which requires that any transaction between related parties must be independent and on an equal footing.

In practice, it means that if two companies from the same group derive profits at a level above or below the market level, the profits may not meet the arm’s length standards. As a consequence, tax authorities may make the necessary adjustments to bring the taxable profit of the associated parties in line with the at arm’s length principle. Judging by the importance of asset management as a leading industry in Luxembourg, tax authorities are likely to focus on the appropriateness of the transfer pricing of their transactions.

Caroline Goemaere, Transfer pricing asset management partner at PwC Luxembourg, commented: “All services transactions with related party portfolio managers, marketers, investment advisors, fund administrators, etc. need to meet the arm’s length standard. The price for those services which can be expressed as a percentage of the total asset management fee, as a “cost plus” mark up for the service provider, or as a fixed number of basis points linked to the amount of assets under management, should result in a profit margin that adequately reflects the value of the assets, services and risks within the value chain of the business.”

Trends and challenges

The changing operating models within both the traditional and alternative investment management industry will impact the transfer pricing policies going forward. Changing distribution models and fee models will all need to be accounted in the years to come.

BEPS  and more specifically the draft transfer pricing documentation guidelines, which provides for a three tiered approach to documentation including Country-by-Country reporting, will, if adopted, change the transfer pricing documentation landscape and approaches considerably.

UCITS Management Companies and AIFMs need to make sure that their transfer prices are set in accordance with the arm’s length principle and are well documented to cope with potential questions during tax audits abroad.

As a result of both national and international initiatives such as BEPS, tax controversy is likely to increase over the coming years. Bi-lateral Advance Pricing Agreements or Mutual Agreement Procedures may in such case be considered.

Investment managers with international operations need to cope with an ever-changing operational, regulatory, tax and transfer pricing landscape. Staying tuned with the latest trends and challenges is the best way for asset managers to comply.