Luxembourg Tax Alert 2020-13

Luxembourg Tax Alert 2020-13



Julien Bieber

Partner, Alternative Investments

KPMG in Luxembourg


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Luxembourg tax authorities publish synthesized texts of tax treaties amended by the MLI

Luxembourg – OECD – Multilateral Instrument – Tax Treaties

On June 8, 2020, the Luxembourg tax authorities (“LTA”) announced that synthesized texts of tax treaties that have been amended by the Multilateral Instrument (“MLI”) have been made available on the website of the tax authorities.

The synthesized texts (drafted in English) display in a single document the original text of each Covered Tax Agreement (“CTA”) and highlight those provisions that have been amended or added by the MLI.

At this stage, synthesized texts are available for the CTA with Georgia, Guernsey, Isle of Man, Iceland, Israel, Jersey, Lithuania, Latvia, Serbia and United Arab Emirates. Others will follow as the consultation process with other competent authorities is completed.

The objective of the LTA is to help taxpayers understand the effects of the MLI on each impacted CTA. As emphasized by the LTA, however, the authentic legal texts of each tax CTA as well as the text of the MLI itself take precedence and remain the legal texts applicable.

This is in line with the explanatory statement of the MLI, that the MLI will not function in the same way as an amending protocol to an existing tax treaty (which would directly amend the text of a given treaty), but instead it will be applied alongside the existing tax treaties modifying their application only in respect of specific articles.

Therefore, the synthesized texts should be read with caution and any conclusion drawn should be confirmed with the text of the respective CTA and the MLI.

Timing: Entry into effect of the provisions of the MLI

Interestingly, the synthesized texts include some guidance given by the LTA with respect to the timing aspects of the entry into effect of the provisions of the MLI. These remarks, even though made in the form of a disclaimer, are welcomed since the timing rules of MLI are particularly complex. 

As explained by the LTA, each of the provisions of the MLI could take effect on different dates, depending on the types of taxes involved (taxes withheld at source or other taxes levied) and on the choices made by Luxembourg and the other contracting state in their MLI positions.

To this end, it is highly recommended that the timing impact of certain MLI provisions that could be applicable to a taxpayer are examined in detail.

Based on the published synthesized texts, the provisions of the MLI for certain tax treaties and certain taxes have already entered into effect in 2020.

Main impact of the MLI: The principal purpose test (“PPT”)

As a reminder, the most important impact of the MLI on the CTA concluded by Luxembourg relates to the introduction of the measures for the prevention of treaty abuse.

The PPT provides that if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining treaty benefits is one of the principal purposes of an arrangement or transaction, then treaty benefits will not be granted, unless the granting of these treaty benefits in these circumstances is in line with the object and purpose of the relevant treaty provision.

The introduction of the PPT is expected to cause significant changes in the way the application of tax treaties is approached by many jurisdictions. Depending on how the tax authorities or national courts will apply it, the PPT might affect many international structures. 

Increased uncertainty and practical recommendations

The entry into force of the PPT adds an extra element of risk for those taxpayers that engage in cross-border operations or maintain international holding structures that rely on treaty benefits. In addition, for those taxpayers that also operate within the European Union (“EU”), the interaction of the PPT rule with the EU anti-abuse framework is an additional consideration that needs to be assessed. 

Even though uncertainty clearly exists on the interpretation of the PPT and will likely remain until it becomes the object of administrative guidelines and case law, it is highly recommended that taxpayers should start evaluating the tax risk in their structures in time and review the substance and functions of their holding or finance company.

In addition, as from now, these rules should be closely assessed when contemplating new investments and evaluating the sustainability of existing holdings.

Appropriate and timely monitoring of the risk will help taxpayers gain control of the uncertainty associated with this complex rule and avoid undesirable future tax cash impacts.

At KPMG Luxembourg, we have a dedicated team of experts that follow closely the academic, practical and judicial developments in the area of the new complex anti abuse legislation and can support the tax functions of companies to address the potential risks in time.

© 2022 KPMG Luxembourg, Société anonyme, with registered office at 39, Avenue John F. Kennedy, L-1855 Luxembourg, registered with RCS Luxembourg under number B149133, and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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