On 22 March 2018, the OECD announced that the Multilateral BEPS Convention(PDF 276Kb) (also known as the “Multilateral Instrument” or the “MLI”) will enter into force on 1 July 2018 following the deposit of the ratification instrument by a fifth jurisdiction (Slovenia).

The other four countries which have ratified the MLI and deposited their instruments with the OECD are Austria (September 22 2017), the Isle of Man (October 19 2017), Jersey (December 15 2017), and Poland (January 23 2018). The entry into force of the MLI on 1 July 2018 will bring it into legal existence in these five jurisdictions, and according to the MLI rules, its content may start to have effect for these countries as from 2019. 

Luxembourg signed the MLI to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS) on 7 June 2017. You can find more information on the MLI and the choices that were made by Luxembourg in this respect in our Tax Alert.

Luxembourg has not ratified the MLI yet, but is expected to do so in 2018. Once Luxembourg has ratified the MLI, its application per covered tax agreement (i.e. double tax treaties for which the MLI will apply) will need to be analysed on a case-by-case basis. In general, two dates will need to be considered for the application of the matching MLI provisions to a covered tax agreement.

Let’s take the example of the tax treaty with Poland. As mentioned above, Poland has already ratified the MLI. In addition, the treaty with Poland is a covered tax agreement.

The entry into force of the MLI for this covered tax agreement will be on the first day of the month following 3 calendar months after the ratification by Luxembourg.

This means that if Luxembourg ratifies the MLI in September 2018, the MLI should enter into force for the tax treaty between Luxembourg and Poland on 1 January 2019. If Luxembourg ratifies the MLI in December 2018, the MLI should enter into force for the tax treaty between Luxembourg and Poland on 1 April 2019.

The entry into effect of the matching provisions (including inter alia the principal purpose test) will depend on the date of entry into force and the type of taxes:

1. For withholding taxes: the entry into effect of the MLI provisions will be on or after the first day of the next calendar year that begins on or after the entry into force.
2. In simple terms, this means that if Luxembourg ratifies the MLI before 30 September 2018, the MLI should enter into force on 1 January 2019 and the matching provisions should apply as of 1 January 2019. If Luxembourg ratifies the MLI in December 2018, the MLI should enter into force on 1 April 2019 and the matching provisions should apply as of 1 January 2020.
3. For all other taxes: the MLI provisions will apply to taxable periods beginning on or after the expiration of six calendar months from the date of entry into force.
4. If the MLI enters into force on 1 January 2019, the MLI provisions would apply to taxable periods starting on or after 1 July 2019. This means that in the case of taxpayers having a taxable period that follows the calendar year, the MLI provisions would apply as of 1 January 2020 only.

The MLI provisions on the entry into effect of each covered tax agreement (including those concerning Luxembourg) are quite complex and will require an analysis on a case-by-case basis

Once Luxembourg has ratified the MLI (which is expected to happen in 2018), one should bear in mind the following questions:

• Is the tax treaty in question effectively a covered tax agreement (which may not be the case if, for instance, the other country has not signed the MLI or has not chosen the tax treaty with Luxembourg in its list of covered tax agreements),
• Has the other contracting State ratified the MLI, and
• When shall the matching provisions enter into effect.

We remain at your disposal to help you in this tedious process and to answer any questions you may have on the MLI implementation and its impact in Luxembourg.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.