Recent developments have had a major impact on transfer pricing in Luxembourg.
A large number of controlled transactions involving Luxembourg companies are financial transactions. From the second half of 2023, the European Central Bank ("ECB") and the United States Federal Reserve ("FED") have continued to raise interest rates. The numerous increases in interest rates
have completely changed the economic environment, and at record speed. Indeed, the policy adopted by the central banks of the Western world in terms of key interest rates has had a major impact on transfer prices over the last 12 months.
Generally speaking, arm's length interest rates are significantly higher today than they were at the end of 2021. However, interest rates are generally determined when the debt instrument is granted and do not need to be updated during the life of the financial instrument, unless expressly stipulated in the contract by means of a specific interest rate review clause. Therefore, while the new conditions may not be reflected in debt instruments that have been granted in the past, they will in any case have to be taken into account for new instruments.
Recently, the FED, the ECB and other central banks have signalled that key interest rate cuts are envisaged in the near future.