Luxembourg Tax Alert 2018-14
In early July 2018, the Luxembourg government released a bill (n° 7333) for the ratification of the Multilateral Instrument (MLI) into domestic law.
The MLI, which was developed by the OECD to implement Base Erosion and Profit Shifting (BEPS) measures into double tax treaties, was signed by Luxembourg in June 2017.
The bill simply approves the text of the MLI as initially signed by Luxembourg including all the reserves and notifications made in this regard.
The timeline for the ratification process in Luxembourg, and therefore the application date of the MLI provisions to Luxembourg covered tax treaties, is not known yet. However, all things considered, one may expect that the MLI provisions may start applying to most covered tax treaties as of January 2020, and only to a few of them as from 2019 as further described below.
Which tax treaties will be concerned?
Luxembourg has chosen to include all its tax treaties in force in the MLI. However, out of 82 tax treaties in force in Luxembourg, only 62 are currently covered tax agreements (i.e. double tax treaties for which the MLI will apply) based on the choices made by the other States.
What provisions will apply to those tax treaties?
The bill provisions are in line with the initial choices made by Luxembourg upon signature of the MLI in June 2017. This includes the minimum standards on treaty abuse (i.e. a specific preamble text and the insertion of a principal purpose test - PPT) and the minimum standards for making dispute resolution mechanisms more effective. Luxembourg has also chosen a few additional provisions in line with Luxembourg’s current treaty policy. For instance, in relation to the permanent establishment provisions, Luxembourg has chosen to apply option B for the specific activity exemption, and for the application of methods for elimination of double taxation, Luxembourg has chosen option A to address problems arising from the inclusion of the exemption method in tax treaties. You can find more information on the provisions chosen by Luxembourg in our Tax Alert.
The application of these provisions to each covered tax agreement will depend, however, on the corresponding choices made by the other contracting States. A case-by-case analysis is therefore required. To help in this complex exercise, one may refer to the matching tool developed by the OECD.
When will the new provisions apply?
The timeline for the ratification process in Luxembourg is not known yet. However one might expect it to be completed before year-end.
Once Luxembourg has completed the ratification process of the MLI (i.e. once the bill is voted and the ratification instruments are deposited with the OECD), its application per covered tax agreement will depend on the ratification date by the other contracting state and on the type of tax concerned, i.e., withholding tax or other taxes.
As of today, the following countries have already ratified the MLI (into their domestic law): Austria, Isle of Man, Jersey, New Zealand, Poland, Serbia, Slovenia, Sweden, and the United Kingdom. Luxembourg has a tax treaty with all these countries, except New Zealand. For the application date, this means that if Luxembourg ratifies the MLI in December 2018, the matching provisions on withholding taxes and on other taxes (for taxpayers having a taxable period that follows the calendar year) should apply to those tax treaties as of 1 January 2020. It is only in the cases where Luxembourg would ratify the MLI before 30 September 2018 that the matching provisions on withholding taxes would apply as of 1 January 2019, with the matching provisions on other taxes to any taxable periods starting after 1 July 2019.
For the other countries with which Luxembourg has a covered tax agreement, the application date of the matching provisions will depend on their ratification date of the MLI, but in most cases, they are not expected to apply before 1 January 2020.
You can find more information on the ratification process and the possible dates of application in our Tax Alert.
The ratification of the MLI will represent another significant step in the implementation of the BEPS measures in Luxembourg.
Considering the complexity of the MLI rules, the actual date of application of the matching provisions will have to be analysed on a case by case basis for each covered tax treaty.
All things considered, the MLI provisions are in general not expected to apply to most Luxembourg covered tax treaties before 2020, but this is to be checked for each of them.
Stay tuned for more information.
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