1. Intermediary Financing
2018

2. Transfer Pricing Example
ParentCo
Transfer Pricing Example
United Kingdom
Intermediary Financing Services
Entities background
ParentCo is a United Kingdom company
LuxCo is a Luxembourg company, which was incorporated as a Societe Anonyme, for an unlimited period and with a share capital for the amount of EUR 31,000,
GermCo is a German Company, which was incorporated in order to act as a special purpose vehicle to perform the acquisition of a real estate building located in Germany.
LuxCo
Luxembourg
GermCo
Germany
Real Estate Building
Germany

3. Transfer Pricing Example
ParentCo
Transfer Pricing Example
United Kingdom
Interest Expense
EUR 148,000 (Operational Expense
Loan Agreement
EUR 10,000,000
(Loan Payable)
Intermediary Financing Services
Transaction details
ParentCo has subscribed a loan Agreement (Loan Payable) from LuxCo for an amount of EUR 10,000,000. In exchange, Luxco has paid interest expense for an amount of EUR 148,000 (for the first year).
LuxCo has granted a loan Agreement (Loan Receivable) to GermCo for the same amount. In exchange, LuxCo has received interest income for an amount of EUR 150,000 (for the first year).
Caractherization of the transaction
LuxCo is receiving funds on behalf of GermCo in order to perform the acquisition of a real estate building located in Germany (investment). Therefore, it should be treated as the equivalent to one single incoming and outgoing transaction and considered as intra-group financing services provided by LuxCo to GermCo.
LuxCo is performing loan origination activities and assuming equity at risk on behalf of GermCo. Thus, this transaction is in line with the Circular’ requirements, therefore a transfer pricing study should be performed in order to determine the arm’s length remuneration (equity at risk remuneration).
LuxCo
Luxembourg
Interest Income
EUR 150,000 (Operational Revenue)
Loan Agreement
EUR 10,000,000 (Loan Receivable)
GermCo
Germany
Real Estate
Building
Germany

4. Transfer Pricing Example
ParentCo
Transfer Pricing Example
United Kingdom
EUR 10,000,000
(Loan Payable)
Intermediary Financing Services
i) Amount of equity at risk of EUR 101,581.
ii) Equity at risk remuneration of
EUR 156,613.
iii) Taxable Income of EUR 8,613.
Transfer
Pricing Study
No Transfer Pricing Study
If LuxCo does not prepare a Transfer Pricing Study, LuxCo is exposed to the following:
Transfer pricing adjustment: A minimum net income after taxes equal to 2% on the assets financed based upon the circular (one year). For LuxCo, It means a transfer pricing adjustment for the amount of EUR 274,273.
Transfer Pricing Study
If LuxCo prepares a Transfer Pricing Study, LuxCo is not exposed to transfer pricing adjustments and shoud determine the following components:
Amount of equity at risk: Based on a credit risk analysis of GermCo, it was determined that the amount of equity that LuxCo is assuming at risk on behalf of GermCo is equal to EUR 101,581.
Equity at risk remuneration: Based on the Capital Asset Pricing Model, it was determined that the amount of equity at risk remuneration to be paid by GermCo to LuxCo is equal to EUR 156,613.
Taxable income: As a consequence of the equity at risk remuneration, it was determined that the amount of taxable income is equal to EUR 8,613.
LuxCo
Yes
Luxembourg
EUR 10,000,000 (Loan Receivable) No
TP adjustment for the amount of EUR 274,273 (one year).
GermCo
Germany
Real Estate
Building
Germany