Substance has never been so much in the eye of the storm. Questioned by foreign tax authorities and courts with potential significant tax consequences, this topic is continuously evolving and needs to be monitored closely.
We are currently experiencing in Luxembourg a very large increase of tax and transfer pricing audits, mainly addressing intermediary financing activities.
There are two words to keep in mind in this respect:
- substance and,
- transfer pricing documentation.
Both are actually very much interrelated because the objective of the TP documentation is not only to support the prices used by group companies for their loans, guarantees or management services.
It is also to detail the functionality of the company, in other words the governance and substance in place around those transactions. Now, you may wonder what is the main takeaway at this stage of the audits which are not closed yet? Well, pricing properly transactions is necessary, but not sufficient anymore. It is also crucial to demonstrate that the company has sufficient substance to monitor, manage and control the risks in relation with its inter-company financing transactions.
Also, if substance has become key for the tax authorities, it is also a matter of prime importance for asset managers as illustrated by our substance survey for 2020.
The 2020 edition of KPMG Luxembourg’s Substance Survey aims to provide a window into asset managers with a footprint in Luxembourg. In comparison with last year:
- offices keep growing in size and in the number of entities managed,
- the percentage of alternative investment asset managers with an AIFM license in Luxembourg has doubled in a year — from around 30 to 60 percent of those surveyed. As a result, this has triggered a surge in the number of workers performing middle-office functions within Luxembourg offices (trend already noticed last year),
- the population of AIFM conducting officers is growing faster than any other, and
- the number of administrative staff has also increased, with AIFM conducting officers requiring administrative support.
We expect this staff expansion to continue, two-thirds of assets managers surveyed expect to onboard an average of two people over the next six months.
Luxembourg’s shift from a holding location for SPVs to a prime location for funds and alternative investment asset managers demonstrates that substance is not a big deal for investors. In this respect, the asset managers surveyed are more confident in their level of substance — rising from 50 to 80 percent in this year’s survey.
Table of contents
Substance trends impacting AI sector?