The MLI is the result of OECD BEPS Project Action 15, whose purpose is the swift and efficient implementation of some BEPS measures into existing tax treaties of the MLI signatories, without need to renegotiate every bilateral tax treaty separately. Presented at OECD in Paris on 7 June 2017, the MLI has been signed by 87 countries so far.
Entry into force for Luxembourg
Since the ratification process has been formally completed, the MLI will enter into force on 1 August 2019.
Luxembourg designated 81 tax treaties as Covered Tax Agreements (the “CTAs”), i.e. treaties to be modified through the MLI provided that the treaty partner has also formally ratified the MLI. Indeed, modifications of a bilateral tax treaty cannot be effective as long as both countries have not formally agreed to these modifications. The MLI, whose purpose is to modify rapidly bilateral tax treaties in order to comply with the new international tax standards, must thus be formally ratified by both parties to a double tax treaty in order to have any effect. In addition, the MLI includes many options and possibilities of reservations for countries, so that the scope of the modifications of a bilateral tax treaty impacted by the MLI must be carefully analyzed on a case by case basis.
To what extent the entry into force of the MLI for Luxembourg will be effective on bilateral tax treaties depends on the treaty partners confirming bilateral treaties with Luxembourg as CTAs, and depositing their instruments of ratification, acceptance or approval of the MLI with the OECD and, finally, on the matching reservations and options taken.
At the time of the writing, among Luxembourg designated CTAs, only Austria, Finland, France, Georgia, Guernsey, Ireland, Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, Netherlands, Poland, Serbia, Singapore, Slovak Republic, Slovenia, Sweden and UK deposited the ratification instruments with the OECD.
Actual effect on bilateral conventions signed by Luxembourg
With respect to the specific CTA, the date of entering into effect of MLI provisions will depend on whether the relevant provisions involve withholding tax or not.
1) In case withholding taxes are involved (for instance reduced withholding tax rate is refused because the taxpayer does not meet the principal purpose test), MLI provisions will enter into effect the earliest as from 1 January 2020 regarding Luxembourg CTAs with jurisdictions that have already deposited their ratification instruments (see above), as well as for CTAs with those jurisdictions who will deposit their ratification instruments by 30 September 2019 at the latest (i.e. the 1st day of the year following the one during which the MLI entered into force for both contracting countries, following the completion of all ratification process). For the Luxembourg treaty partners who deposit their instruments after that date, withholding tax provisions will thus not be effective before 1 January 2021.
2) For all other modifications, the MLI provisions will enter into effect for the taxable periods commencing at least six months after the date at which the MLI entered into force for both contracting States concerned, except for the mutual agreement procedure which is immediately applicable as from this date.
Main changes for Luxembourg bilateral conventions covered?
Luxembourg definitive MLI positions have not been changed compared to the initial list of reservations and options that were provided at the time of signing the MLI.
1) Minimum standards
The MLI provisions regarding treaty abuse and dispute resolution represent minimum standards and are obligatory in nature. With respect to the general anti-abuse provision, Luxembourg opted for the principal purpose test (the “PTT”) according to which the treaty benefits may be denied when one of the principal purposes of the arrangement or transaction in question is to obtain such benefits, unless granting such benefits would be in accordance with the object and purpose of the relevant CTA.
2) Luxembourg MLI options
Finally, Luxembourg accepted the following optional provisions:
- Article 3 - Transparent entities (with the exception of Article 3(2)) – setting out that the benefits of a CTAs are not granted in respect of the income derived through a wholly or partially fiscally transparent entity when under national law of none of the contracting jurisdictions treats the income of an entity as an income of its resident.
- Article 5 - Application of Methods for Elimination of Double Taxation - Luxembourg accepted the option A, i.e. granting a tax credit for the foreign tax on the income or capital instead of granting an exemption otherwise provided by the relevant CTA when other contracting state applies the said CTA to exempt such income (cases of conflict of qualification).
- Article 13 - Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions - Luxembourg opted to apply Option B, which foresees that activities excluded from PE definition under CTAs will not create a PE, as a result of the application of MLI, irrespective of whether such activities are of preparatory or auxiliary nature.
- Article 19 - Mandatory Binding Arbitration – Luxembourg opted for the arbitration procedure to apply in cases where an issue is not resolved through the Mutual Agreement Procedure within two years, unless a court or administrative tribunal has already rendered a decision on that matter before the arbitration decision.
3) Luxembourg MLI reservations
Luxembourg reserved the right not to apply the following articles in their entirety:
- Article 4 - Dual Resident Entities (new tie-breaker rule);
- Article 8 - Dividend Transfer Transactions (minimum holding period to benefit from the withholding tax reduction under bilateral treaty);
- Article 9 - Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property (subject to tax in the country where real estate is located);
- Article 10 - Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions;
- Article 11 - Application of Tax Agreements to Restrict a Party's Right to Tax its Own Residents;
- Article 12 - Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies;
- Article 14 - Splitting-up of Contracts;
- Article 15 - Definition of a Person Closely Related to an Enterprise.
Tiberghien Luxembourg remains committed to monitor the legal and practical implications regarding the application of the MLI provision within the Luxembourg treaty network.
For any questions, please contact your trusted advisor at Tiberghien Luxembourg or contact any of the authors of this publication.