On 7 June 2017, at the official signing ceremony, Luxembourg signed the Multilateral Instrument (MLI) aiming to implement the tax treaty-related measures deriving from the OECD Base Erosion and Profit Shifting (BEPS) Project. Taxand Luxembourg explores this update.
Not all 81 Luxembourg tax treaties will be affected as both the Luxembourg and foreign jurisdiction have to have signed the MLI (25 countries including the United States do not intend to sign), adopted matching options/alternatives and ratified the MLI in order for the changes to enter into force.
Luxembourg has adopted the minimum standards to remain BEPS-compliant, while deciding not to opt into certain provisions which could be seen as detrimental to competitiveness (Limitation on benefits, immovable property provision, rules on dividend transfer transactions, some permanent establishment rules, hybrid mismatches for transparent entities, dual residence, etc.).
Luxembourg’s choices can be interpreted as positive, as care has been taken not to complicate the current situation of tax payers while also opting for additional legal certainty through the adoption of the binding arbitration procedure, helping mitigate situations of double taxation.
Since the amendment of a tax treaty by the MLI is subject to several conditions, an analysis of the approach taken by all Luxembourg tax treaty partners is necessary in order to determine which tax treaty will ultimately be impacted. Tax payers with Luxembourg structures relying on tax treaty benefits should seek the advice of their tax adviser in order to determine whether relevant tax treaties will or will not be amended by the MLI and whether the potential changes to be introduced may challenge the efficiency of their structure.