The banking and capital markets sector has been facing various challenges over the last years ranging from increasing regulations and focus on risk management, a rapidly transforming banking landscape, increased cost pressure and the rise of technology.

In addition, the OECD Base Erosion and Profit Shifting (BEPS) initiative has fundamentally changed the international tax landscape since 2015. Many jurisdictions are now in the process of revising their domestic tax regulations and treaty framework that will affect the Financial Services (FS) sector.

Luxembourg also started formalizing its transfer pricing (TP) regime by transposing the latest OECD guidance and principles outlined by the OECD TP Guidelines (including an increased focus on TP documentation).

Current challenges for the banking and capital markets sector from a tax perspective include:

• Tax impact of regulatory developments (Basel III) on the banking and capital markets sector ranging from i) funding or capital increases to meet liquidity/capital requirements and interaction with determination of free capital for banking branches and ii) funds transfer pricing (FTP) requirements under Basel III as a new framework for pricing the provision of liquidity;
• The overlap of the discussion on organizational and economic substance in context of the tax and regulatory dimension;
• Attribution of financial assets, profits and branch capital in the context of permanent establishment specific to the banking sector based on the Authorized OECD Approach (AOA);
• BEPS impact on the TP treatment of core banking transactions covering global trading with different booking models, capital markets and underwriting, investment banking, loan origination and syndication, securities lending, custody banking and sales credits;
• Intercompany services and management activities with respect to determination of beneficial activities, cost base and allocation;
• Tax treatment of intangibles covering trademarks and technology or guarantees specific to the FS sector;
• Increased focus on the tax as part of corporate governance function.

The asset management sector is one of the fastest growing sectors in the financial industry. Various market trends such as new distribution channels, increased cost pressure, regulatory change and the rise of intangibles are shaping the industry.

In addition, the OECD Base Erosion and Profit Shifting (BEPS) initiative has fundamentally changed the international tax landscape since 2015. Many jurisdictions are now in the process of revising their domestic tax regulations and treaty framework that will affect the Financial Services (FS) sector.

Luxembourg also started formalizing its transfer pricing (TP) regime by transposing the latest OECD guidance and principles outlined by the OECD TP Guidelines (including an increased focus on TP documentation).

Current challenges for asset managers from a tax perspective include:

• The overlap of the discussion on organizational and economic substance in context of the tax and regulatory dimension;
• BEPS impact on the appropriateness of existing TP policies and approaches specific to the asset management sector. These cover the split of management fees for the remuneration of cross-border distribution, investment management, fund production, administration and other services;
• How to remunerate the unique role of captive regulated management companies (ManCos) in the asset management sector that are licensed under the UCITS and/or AIFMD directives;
• Tax treatment of intercompany services and management activities with respect to determination of beneficial activities, cost base and allocation;
• The rise of intangibles covering technology (e.g. in the form of end-to-end investment platforms) and marketing and to what extent the use should be remunerated via a license of service fee;
• Increased focus on the tax as part of corporate governance function.

The insurance sector faces unprecedented opportunities and challenges. Opportunities range from expansion into new business models, type of products and services to new distribution channels/platforms. Challenges include the increasing regulatory environment, operational transformation and cost pressure as well as the low interest environment.

In addition, the OECD Base Erosion and Profit Shifting (BEPS) initiative has fundamentally changed the international tax landscape since 2015. Many jurisdictions are now in the process of revising their domestic tax regulations and treaty framework that will affect treasury arrangements.

Luxembourg also started formalizing its transfer pricing (TP) regime by transposing the latest OECD guidance and principles outlined by the OECD TP Guidelines (including an increased focus on TP documentation).

Current challenges for insurance companies from a transfer pricing perspective include:

• The overlap of the discussion on organizational and economic substance and financial capacity to bear risk;
• Impact of BEPS on the appropriateness of existing TP policies and approaches;
• Linking actuarial and tax approaches to support intra-group reinsurance transactions covering aspects of business rationale and sufficient diversification of risk portfolio and support for pricing using both direct approaches (valuation of reserves and support for ceding commission and experience refunds) and indirect (corroborative) approaches (e.g. return on capital);
• Transfer pricing approaches for investment management activities (covering remuneration via split of management fees);
• Attribution of profits, assets and free capital to insurance branches;
• Remuneration for use of intangibles (esp. trademarks) and provision of head office, back-office and management services;
• Consideration for financial guarantees; and
• Tax audit environment and documentation/defense.