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Luxembourg ratifies 20 OECD compliant exchange of information protocols and treaties and defines the new rules of the game

27 May 2010

12 exchange of information protocols as well as 8 new double tax treaties have now been ratified by Luxembourg. At the same time, the procedure applicable to exchange of information upon request was adopted.

In order to comply with the demands of the G20, Luxembourg has renegotiated part of its Double Tax Treaties ("DTTs"). This followed the announcement made by the Luxembourg Government on 13 March 2009 regarding its commitment to comply with OECD standards on international tax cooperation. As a result, Luxembourg was removed from the so-called OECD "grey list" of the OECD Report on the jurisdictions surveyed by the OECD Global Forum on the implementation of the internationally agreed tax standards. Taxand Luxembourg reviews the DTTs that are now OECD compliant and identifies the changes to the exchange of information procedure.

Luxembourg DTTs which are now OECD compliant
There are 21 DTTs in line with the current version of article 26 of the OECD Model Tax Convention and they have been concluded with the following countries: Armenia, Austria, Bahrain, Belgium, Denmark, Finland, France, Germany, Iceland, India (in application of the most favoured nation clause included in the Indian-Luxembourg protocol), Liechtenstein, Mexico, Monaco, Netherlands, Norway, Qatar, Spain, Switzerland, Turkey, UK and USA.

Exchange of information under the amended DTTs
The rules as regards exchange of information upon request only apply to the 21 above-mentioned DTTs. These rules do neither apply to other DTTs nor to a pure domestic context.

The 21 new treaty provisions only relate to the exchange, upon request, of information, which may be considered to be foreseeably relevant to the correct application of the relevant DTT or the tax law of the 21 countries that have signed the said DTTs. As a result, no so-called fishing expeditions may be undertaken as the given treaty partner must demonstrate to what extent the information sought may be foreseeably relevant.

The new provisions oblige the information holder to provide the information within a one month delay following the notification by the tax authorities of their request for information. Otherwise, a fine of up to EUR 250.000 can be applied. An appeal can be made against the information request or against the fine within a delay of one month and an appeal of the administrative tribunal decision can be made within a delay of 15 days following the notification of the decision.

While the holder of the information is not defined in this new law, the commentaries to the draft law assert that the information holder is to be understood in the broadest sense and includes in particular professionals of the financial and insurance sectors. In this manner, the new provisions introduce a legal exception to the professional secrecy as defined by the financial sector law as well as the insurance sector law.

The same commentaries specifically exclude certain professional relationships from the scope of the present law and refer in this respect to the 2002 commentaries to the OECD Model Tax Convention according to which "The provisions (...) shall not impose (...) the obligation to obtain or provide information, which would reveal confidential information between a client and an attorney, solicitor or other admitted legal representative where such communications are produced for the purposes of seeking or providing legal advice or produced for the purposes of use in existing or contemplated procedures".

The commentaries go on to provide the example of a lawyer who also acts as domiciliary agent or as company director. In his capacity of a domiciliary agent or company director, the lawyer would be required to provide information requested by the tax authorities. Any information obtained in his capacity of legal adviser could be withheld.

Next steps
Assuming that the ratification by all contracting states will occur prior to year end, the new rules of exchange of information will apply:

  • in most cases to tax years starting on or after 1 January 2011
  • as far as France, Germany and India are concerned, to tax years starting on or after 1 January 2010
  • to the US, to tax years starting on or after 1 January 2009.

Since the new rules only apply to the 21 above-mentioned protocols and treaties, future DTTs or exchange of information protocols will require either a specific law or the scope of the present law will have to be extended.

Taxand's Take

All in all, the procedure is far from being clear and Luxembourg professionals and clients will be required to live through a period of uncertainty before all open issues have been solved in practice.

Nevertheless, Luxembourg has taken a decisive step towards adopting the minimum OECD standards in regards of cooperation between foreign tax authorities. Whether this will be enough for its EU and G20 partners remains to be seen.

Your Taxand contact for further queries is:
Paul Chambers

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