Luxembourg Signs MLI To Implement Tax Treaty Related BEPS Measures

AT A GLANCE

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. 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. INTRODUCTION

On the evening of 7 June, Luxembourg, together with 67 other jurisdictions, signed the Multilateral Instrument (MLI) aiming to implement the tax treaty-related measures deriving from the OECD Base Erosion and Profit Shifting (BEPS) Project. Eight additional countries signed a letter expressing their intention to sign the MLI. The MLI is a comprehensive and flexible convention that allows countries to implement a wide range of tax treaty related BEPS measures with many options and alternatives. Which approach has been taken by Luxembourg to remain competitive in a more and more harmonised tax world and which of the Luxembourg tax treaties will be amended by the MLI?

What is the purpose of the MLI and how does it work?

The OECD BEPS Project sets out 15 actions, many of which concern bilateral tax treaties. Given the sheer number of tax treaties in place, implementing these changes on a treaty-by-treaty basis would be a very lengthy process, requiring 3000-plus sets of bilateral negotiations. Therefore, Action 15 of the BEPS Project provides for the development of a MLI in order to allow countries to swiftly amend their tax treaty network.

The MLI covers BEPS measures relating to:

Action 2 (Hybrid mismatches), Action 6 (Tax treaty abuse), Action 7 (Artificial avoidance of permanent establishment status) and Action 14 (Dispute resolution). Given that the BEPS...