On June 7th 2017, Luxembourg took part in the first signing session of the Multilateral Convention developed by the Organisation for Economic Co-operation and Development (“OECD”) to implement tax treaty related measures to prevent base erosion and profit shifting (“MLI”) in accordance with BEPS action 15 (please refer to January 2017 Newsletter).
On the same day, Luxembourg released the list of the reserves and options that may apply to its Covered Tax Treaties (i.e. tax treaties signed with jurisdictions that have also signed the MLI). The position of Luxembourg is still subject to change.
The MLI imposes on the signing jurisdictions a duty to implement certain minimum standards in their Covered Tax Treaties such as (i) the preamble that states that the purpose of a double Tax Treaty is to be interpreted as to eliminate double taxation without creating opportunities for non-taxation, (ii) measures to improve dispute resolution and (iii) the principal purpose test (“PPT”), which aims at denying the benefit of a Covered Tax Treaty if the principal purpose of a transaction or an arrangement is to obtain that benefit.
For those jurisdictions that want to go beyond the minimum standards, options are available. Luxembourg has taken the following positions:
- On transparent entities (Article 3): Luxembourg decided to apply this option to its Covered Tax Treaties. This article provides that income derived by or through an entity or arrangement that is treated as wholly or partially fiscally transparent under the tax law of either Contracting Jurisdiction shall be considered to be income of a resident of a Contracting Jurisdiction but only to the extent that the income is treated, for the purpose of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction.
- On the elimination of double taxation (Article 5): various options were available. The option selected by Luxembourg consists in not applying provisions of a Covered Tax Treaty that would otherwise exempt income derived by a resident of a Contracting Jurisdiction from tax in that Contracting Jurisdiction for the purpose of eliminating double taxation if the other Contracting Jurisdiction applies the provision of the Covered Tax Treaty to exempt such income or capital from tax or to limit the rate at which such income or capital may be taxed.
- On artificial Permanent Establishment (“PE”) (Article 13): Option B has been selected by Luxembourg. Under this option, the exemptions of PE status for storage, display or delivery of goods and for purchasing of goods or merchandise in existing treaties are preserved whether or not these activities are of preparatory or auxiliary character. Any other activities or a combination thereof carried out through a fixed place of business will not be deemed to constitute a PE if they are of a preparatory or auxiliary character.
- On the arbitration mechanism (Part VI): Luxembourg has chosen to apply the arbitration mechanism available where the competent authorities were not able to solve double tax issues under the mutual agreement procedure.