Luxembourg to sharpen tax rules for intra-group financing

BRUSSELS (Reuters) - Luxembourg on Tuesday said it would sharpen its corporate tax rules, making it more difficult for large corporations to avoid tax by channelling funds through the small European country, a practice exposed in media reports known as “LuxLeaks”.

The rules, entering into force on Jan. 1, firm up the “arm’s length principle”, meaning financing between different units of the same company should be carried out as if they were unrelated firms.

Tax rulings made before the new law enters into force will no apply after the 2016 tax year, Luxembourg’s tax authorities said.

Tax rulings by which officials assured multinationals of advantageous treatment of funds moving through Luxembourg, created outrage in 2014 when the “LuxLeaks” reports unveiled how such deals were brokered for global companies.

Those reports overshadowed the start of Jean-Claude Juncker’s term as EU Commission President, as he was Luxembourg’s Prime Minister for almost two decades before taking office in Brussels.

The European Commission, which enforces competition rules in the European Union, welcomed the new rules but would not say how they would affect its ongoing investigations.

“The general, forward-looking change of approach announced by Luxembourg is very welcome,” Commissioner Margrethe Vestager said in a statement.

Last year, the Commission ordered Luxembourg to recover 20 to 30 million euros ($21-$31 million) from Italy's Fiat FCHA.MI, saying the carmaker had benefited from illegal tax deals with the Grand Duchy.

Reporting by Robert-Jan Bartunek; Editing by Robin Pomeroy