On 9 April 2019, Luxembourg deposited with the Organisation for Economic Cooperation and Development ("OECD") its instrument of ratification of the Multilateral Instrument ("MLI"), after having passed the ratification law on 14 February 2019. Additionally, the Luxembourg tax administration has updated its list of new and ongoing double tax treaty negotiations, including the initialling of a new double tax treaty with Ghana and the long-awaited treaty with Argentina.
The MLI will enter into force for Luxembourg on 1 August 2019. The entry into effect of the MLI provisions for each covered tax agreement or treaty will depend on the entry into force of the MLI for the other contracting State and on the type of taxes concerned - withholding taxes or other taxes. However, it is already clear that the MLI provisions that affect withholding taxes will apply to most of Luxembourg's covered tax agreements as from 1 January 2020 only.
The MLI aims at swiftly implementing the tax treaty measures contained in Actions 2, 6, 7, and 14 of the Base Erosion Profit Shifting ("BEPS") Project of the OECD into covered tax agreements (i.e. tax treaties chosen by all contracting States to be covered by the MLI).
Luxembourg signed the MLI in 2017 and completed its domestic ratification process in February 2019. From a general standpoint, Luxembourg has adopted a restrictive approach when choosing the MLI provisions that would apply to its covered tax agreements. Key features include inter alia the principal purpose test ("PPT") clause and an improved dispute mechanism syste. 1
Application of the MLI provisions to Luxembourg tax treaties - Timeline
The MLI matching provisions will only apply to covered tax agreements. Out of the 81 tax treaties in force with Luxembourg, only 65 tax treaties are currently matching, i.e. are covered tax agreements based on the choices made by the other contracting States.
The application of the MLI provisions to a specific covered tax agreement will depend on the date of entry into force of the MLI for this contracting State (itself dependent on the date of deposit of the ratification instrument with the OECD) and on the date of entry into effect of every specific MLI provision (themselves dependent on the type of taxes covered - withholding taxes or other taxes).
The entry into force of the MLI for a contracting State will be on the first day of the month following 3 calendar months after the deposit of the ratification instrument with the OECD. As Luxembourg deposited its instrument of ratification with the OECD on 9 April 2019, the MLI for Luxembourg will enter into force on 1 August 2019.
The following treaty partners have also deposited their ratification instrument with the OECD: Austria, Finland, France, Georgia, Guernsey, Ireland, the Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, the Netherlands, Poland, Serbia, Singapore, the Slovak Republic, Slovenia, Sweden and the UK. For those jurisdictions, the MLI has therefore already entered into force or will enter into force in the coming months.
The entry into effect of the MLI provisions for each specific covered tax agreement will then be calculated based on a starting point corresponding to the latest of the dates on which the MLI enters into force for each of the contracting States.
– With respect to withholding taxes, the MLI provisions will enter into effect on or after the first day of the next calendar year that begins on or after the latest date of entry into force. This means that the MLI provisions on withholding taxes will apply as from 1 January 2020 for every Luxembourg covered tax agreement where the MLI entered into force for the treaty partner before 31 December 2019.
– With respect to other taxes, the MLI provisions will apply to taxable periods beginning on or after the expiration of six calendar months from the latest date of entry into force. In simple terms, this means that in the event that taxpayers have a taxable period that follows the calendar year, the MLI provisions on other taxes will only apply to Luxembourg covered tax agreements as from 1 January 2021.
Extension of the double tax treaty network
In addition, on 10 April 2019 the Luxembourg tax administration updated the list of ongoing and new negotiations in relation to the Luxembourg double tax treaty network.
A new double tax treaty was initialled for the first time with Ghana as well as the long awaited double tax treaty with Argentina.
With regard to Chile, Mali and the Slovak Republic, it was announced that negotiations for new treaties are underway whereas for the treaties signed with Albania and Kuwait, both of which however are not yet in force, negations are still ongoing in relation to new protocols.
The deposit of the ratification instrument with the OECD is Luxembourg's final legal step in implementing the MLI into its treaty network. Now the exact date of application of the MLI matching provisions to each and every covered tax agreement will need to be analysed taking into consideration inter alia the ratification process in the other treaty country.
This also means that tax treaties signed by Luxembourg with countries that have yet to sign the MLI (for example the United States) or complete the ratification procedure will not be affected by any MLI provisions until such countries have at least signed the MLI and completed the ratification process.
Furthermore, the exact scope and impact of the MLI provisions will need to be checked for every covered tax agreement. Luxembourg has decided to implement only two key provisions via the MLI, i.e. the PPT and the dispute resolution mechanism. Other provisions will be introduced, as the case may be, via bilateral negotiations. Luxembourg taxpayers are therefore advised to carefully monitor any developments with respect to the application of these provisions, more specifically in investment countries. Our tax team is at your disposal to further guide you through this complex matter.
1 More details on the main reservations and notifications made by Luxembourg – unchanged since signature – can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.