On 7 June 2017, over 70 Ministers and other high-level representatives from jurisdictions around the world participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting known as the "Multilateral Instrument" or "MLI". A number of other jurisdictions have also expressed their intention to sign the MLI as soon as possible (e.g. by the end of June for Mauritius) and other jurisdictions are actively working towards signature.

The text of the MLI was adopted (in English and French) on 24 November 2016 further to negotiations involving over 100 countries and jurisdictions under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting.

The MLI enables the transposition of results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. It modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation and implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms, while providing flexibility to accommodate specific tax treaty policies. Treaty measures that are included in the new multilateral convention tackle hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures, including an optional provision on mandatory binding arbitration, which has been taken up by 25 signatories (including Luxembourg) at the time of signature.

Although some of the measures are mandatory (the minimum standards mentioned above), others are subject to choices and options by signatory jurisdictions. You will find hereunder a brief summary of the options chosen / reservations made by Luxembourg (are only addressed articles or paragraphs which indeed require a choice to be made). This is based on the BEPS MLI Luxembourg document published by the OECD and which contains a provisional list of expected reservations and notifications to be made by Luxembourg.

HYBRID MISMATCHES

Article 3 – Transparent Entities: Luxembourg reserves the right for Article 3(2) not to apply to its Covered Tax Agreements.

"1. For the purposes of a Covered Tax Agreement, income derived by or through an entity or arrangement that is treated as wholly or partly 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 purposes of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction.

2. Provisions of a Covered Tax Agreement that require a Contracting Jurisdiction to exempt from income tax or provide a deduction or credit equal to the income tax paid with respect to income derived by a resident of that Contracting Jurisdiction which may be taxed in the other Contracting Jurisdiction according to the provisions of the Covered Tax Agreement shall not apply to the extent that such provisions allow taxation by that other Contracting Jurisdiction solely because the income is also income derived by a resident of that other Contracting Jurisdiction.

3. With respect to Covered Tax Agreements for which one or more Parties has made the reservation described in subparagraph a) of paragraph 3 of Article 11 (Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents), the following sentence will be added at the end of paragraph 1: "In no case shall the provisions of this paragraph be construed to affect a Contracting Jurisdiction’s right to tax the residents of that Contracting Jurisdiction."

4. Paragraph 1 (as it may be modified by paragraph 3) shall apply in place of or in the absence of provisions of a Covered Tax Agreement to the extent that they address whether income derived by or through entities or arrangements that are treated as fiscally transparent under the tax law of either Contracting Jurisdiction (whether through a general rule or by identifying in detail the treatment of specific fact patterns and types of entities or arrangements) shall be treated as income of a resident of a Contracting Jurisdiction."

Article 4 – Dual Resident Entities: Luxembourg reserves the right for the entirety of Article 4 not to apply to its Covered Tax Agreements.

Article 5 – Application of Methods for Elimination of Double Taxation: Luxembourg chooses to apply Option A and reserves the right to not allow other contracting States to apply Option C (see page 7 of the MLI pdf for Option C).

"Option A

2. Provisions of a Covered Tax Agreement that would otherwise exempt income derived or capital owned by a resident of a Contracting Jurisdiction from tax in that Contracting Jurisdiction for the purpose of eliminating double taxation shall not apply where the other Contracting Jurisdiction applies the provisions of the Covered Tax Agreement to exempt such income or capital from tax or to limit the rate at which such income or capital may be taxed. In the latter case, the first-mentioned Contracting Jurisdiction shall allow as a deduction from the tax on the income or capital of that resident an amount equal to the tax paid in that other Contracting Jurisdiction. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income or capital which may be taxed in that other Contracting Jurisdiction.

3. Paragraph 2 shall apply to a Covered Tax Agreement that would otherwise require a Contracting Jurisdiction to exempt income or capital described in that paragraph."

TREATY ABUSE

Article 6 – Purpose of a Covered Tax Agreement – Luxembourg chooses to apply paragraph 3.

"1. A Covered Tax Agreement shall be modified to include the following preamble text:

"Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),".

2. The text described in paragraph 1 shall be included in a Covered Tax Agreement in place of or in the absence of preamble language of the Covered Tax Agreement referring to an intent to eliminate double taxation, whether or not that language also refers to the intent not to create opportunities for non-taxation or reduced taxation.

3. A Party may also choose to include the following preamble text with respect to its Covered Tax Agreements that do not contain preamble language referring to a desire to develop an economic relationship or to enhance co-operation in tax matters:

"Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,"."

Article 7 – Prevention of Treaty Abuse (PPT/LOB/Simplified LOB): Luxembourg chooses to apply Article 7 paragraph 4. Luxembourg has not notified the depositary of a choice to apply the Simplified Limitation of Benefits Provision.

"1. Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.

2. Paragraph 1 shall apply in place of or in the absence of provisions of a Covered Tax Agreement that deny all or part of the benefits that would otherwise be provided under the Covered Tax Agreement where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits.

3. A Party that has not made the reservation described in subparagraph a) of paragraph 15 may also choose to apply paragraph 4 with respect to its Covered Tax Agreements.

4. Where a benefit under a Covered Tax Agreement is denied to a person under provisions of the Covered Tax Agreement (as it may be modified by this Convention) that deny all or part of the benefits that would otherwise be provided under the Covered Tax Agreement where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits, the competent authority of the Contracting Jurisdiction that would otherwise have granted this benefit shall nevertheless treat that person as being entitled to this benefit, or to different benefits with respect to a specific item of income or capital, if such competent authority, upon request from that person and after consideration of the relevant facts and circumstances, determines that such benefits would have been granted to that person in the absence of the transaction or arrangement. The competent authority of the Contracting Jurisdiction to which a request has been made under this paragraph by a resident of the other Contracting Jurisdiction shall consult with the competent authority of that other Contracting Jurisdiction before rejecting the request.

5. Paragraph 4 shall apply to provisions of a Covered Tax Agreement (as it may be modified by this Convention) that deny all or part of the benefits that would otherwise be provided under the Covered Tax Agreement where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits."

Article 8 – Dividend Transfer Transactions: Luxembourg reserves the right for the entirety of Article 8 not to apply to its Covered Tax Agreements.

Article 9 – Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property: Luxembourg reserves the right for Article 9(1) not to apply to its Covered Tax Agreements. Luxembourg has not notified the depositary of a choice to apply paragraph 4 either.

Article 10 – Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions: Luxembourg reserves the right for the entirety of Article 10 not to apply to its Covered Tax Agreements.

Article 11 – Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents: Luxembourg reserves the right for the entirety of Article 11 not to apply to its Covered Tax Agreements.

AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS

Article 12 – Artificial Avoidance of Permanent Establishment Status through Commissionnaire Arrangements and Similar Strategies: Luxembourg reserves the right for the entirety of Article 12 not to apply to its Covered Tax Agreements.

Article 13 – Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions: Luxembourg chooses to apply Option B (see page 48 of Luxembourg document for Covered Tax Agreements) and reserves the right for paragraph 4 not to apply to its Covered Tax Agreements.

"Option B

3. Notwithstanding the provisions of a Covered Tax Agreement that define the term "permanent establishment", the term "permanent establishment" shall be deemed not to include:

a) the activities specifically listed in the Covered Tax Agreement (prior to modification by this Convention) as activities deemed not to constitute a permanent establishment, whether or not that exception from permanent establishment status is contingent on the activity being of a preparatory or auxiliary character, except to the extent that the relevant provision of the Covered Tax Agreement provides explicitly that a specific activity shall be deemed not to constitute a permanent establishment provided that the activity is of a preparatory or auxiliary character;

b) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any activity not described in subparagraph a), provided that this activity is of a preparatory or auxiliary character;

c) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) and b), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

4. A provision of a Covered Tax Agreement (as it may be modified by paragraph 2 or 3) that lists specific activities deemed not to constitute a permanent establishment shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting Jurisdiction and:

a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of a Covered Tax Agreement defining a permanent establishment; or

b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.

5. a) Paragraph 2 or 3 shall apply in place of the relevant parts of provisions of a Covered Tax Agreement that list specific activities that are deemed not to constitute a permanent establishment even if the activity is carried on through a fixed place of business (or provisions of a Covered Tax Agreement that operate in a comparable manner).

b) Paragraph 4 shall apply to provisions of a Covered Tax Agreement (as they may be modified by paragraph 2 or 3) that list specific activities that are deemed not to constitute a permanent establishment even if the activity is carried on through a fixed place of business (or provisions of a Covered Tax Agreement that operate in a comparable manner)."

Article 14 – Splitting-up of Contracts: Luxembourg reserves the right for the entirety of Article 14 not to apply to its Covered Tax Agreements.

Article 15 – Definition of a Person Closely Related to an Enterprise: Luxembourg reserves the right not apply Article 15 to Covered Tax Agreements for which it made reservations foreseen under Article 12(4), Article 13(6)(a) or (c) or Article 14(3).

IMPROVING DISPUTE RESOLUTION

Article 16 – Mutual Agreement Procedure: Luxembourg has not made any reservations on this Article.

Article 17 – Corresponding Adjustments: Luxembourg has not made any reservations on this Article.

ARBITRATION

Article 18 – Choice to Apply Part VI: Luxembourg chooses to apply Part VI

Article 19 – Mandatory Binding Arbitration: Luxembourg reserves the right for the following rules to apply with respect to its Covered Tax Agreements notwithstanding the other provisions of this Article:

a) any unresolved issue arising from a mutual agreement procedure case otherwise within the scope of the arbitration process provided for by this Convention shall not be submitted to arbitration, if a decision on this issue has already been rendered by a court or administrative tribunal of either Contracting Jurisdiction;

b) if, at any time after a request for arbitration has been made and before the arbitration panel has delivered its decision to the competent authorities of the Contracting Jurisdictions, a decision concerning the issue is rendered by a court or administrative tribunal of one of the Contracting Jurisdictions, the arbitration process shall terminate.

Article 23 – Type of Arbitration Process: Luxembourg has not made any reservations on this Article.

Article 24 – Agreement on a Different Resolution: Luxembourg will apply this Article and the reservation foreseen under paragraph 3.

1. For purposes of applying this Part with respect to its Covered Tax Agreements, a Party may choose to apply paragraph 2 and shall notify the Depositary accordingly. Paragraph 2 shall apply in relation to two Contracting Jurisdictions with respect to a Covered Tax Agreement only where both Contracting Jurisdictions have made such a notification.

2. Notwithstanding paragraph 4 of Article 19 (Mandatory Binding Arbitration), an arbitration decision pursuant to this Part shall not be binding on the Contracting Jurisdictions to a Covered Tax Agreement and shall not be implemented if the competent authorities of the Contracting Jurisdictions agree on a different resolution of all unresolved issues within three calendar months after the arbitration decision has been delivered to them.

3. A Party that chooses to apply paragraph 2 may reserve the right for paragraph 2 to apply only with respect to its Covered Tax Agreements for which paragraph 2 of Article 23 (Type of Arbitration Process) applies.

 

FINAL PROVISIONS

Article 36 – Entry into Effect of Part VI: Luxembourg reserves the right for Part VI (Arbitration) to apply to a case presented to the competent authority of a Contracting Jurisdiction prior to the later of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement only to the extent that the competent authorities of both Contracting Jurisdictions agree that it will apply to that specific case.

Concluding remarks

The MLI will swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project via the modification of existing bilateral tax treaties. The first modifications to Covered Tax Agreements are likely to become effective in the course of 2018. The timing of entry into effect is linked to the completion of the ratification procedures in the jurisdictions that are parties to the covered tax treaty. Indeed, the next step is for the signatory jurisdictions to complete their domestic process to ratify the MLI. The MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval. For each signatory ratifying, accepting, or approving the MLI after the deposit of the fifth instrument, the MLI shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such signatory of its instrument of ratification, acceptance or approval.

The OECD acts as depositary of the MLI. The position of each signatory under the convention is already available on the OECD website. By the end of this year, a database and additional tools will be provided by the OECD (on its website) in order to facilitate the application of the convention by taxpayers and tax administrations.

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