Insurers, Private Bankers: Will Beps Affect Your Permanent Establishment Risk?

Financial sector professionals learned long ago that Luxembourg's key geographic position offers a great place for growth. Life insurance and private banking industries have drawn on the Grand Duchy's local expertise and multilingual capabilities in selling their products and services across the EU. In other words, operating in foreign markets via persons, called agents, intermediaries or commissionaires, has become the norm.

Until now, it has generally been supposed that, in the light of the existing tax treaties, such agents, intermediaries, and commissionaires do not constitute permanent establishments (PEs) of Luxembourg entities in the eyes of the relevant foreign countries.

A different look A material change in this analysis might, however, result from the recommendations of the OECD's project against base erosion and profit shifting (BEPS), especially from BEPS Action 7. BEPS Action 7's purpose is to prevent artificial avoidance of PE status, and the recommendation has been drafted in a way that allows foreign countries to increase their rights to recognise a local PE.

A number of life insurance companies and private banks operate internationally and take advantage of the freedom to provide services (which, for many, is at the core of the European Common Market). The implementation of BEPS Action 7 would allow Luxembourg's neighbouring countries to tax the profits attributable to the potentially newly recognised PEs situated in their respective jurisdictions, creating an administrative burden and maybe warranting additional prudential supervision.

Multilateral instrument: Luxembourg and beyond BEPS implementation is particularly complex due to the size of the project, so the OECD has developed the so-called "multilateral instrument" (MLI), which is designed to allow interested countries to swiftly amend their tax treaty network. Only certain BEPS actions are covered by the MLI—Action 7 among them.

The MLI was signed on 7 June 2017, Minister of Finance Pierre Gramegna signing on Luxembourg's behalf. This instrument enables Luxembourg to simultaneously update its 81...