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Deposit of the ratification instrument of the Multilateral Instrument with the OECD : final legal step for Luxembourg

  • United Kingdom
  • Luxembourg
  • Tax planning and consultancy

17-04-2019

On 9 April 2019, Luxembourg filed with the OECD its ratification instrument with respect to the list of reservations and notifications made on the Multilateral Instrument (“MLI”). Such deposit is the final legal step to implement the MLI into the Luxembourg treaty network.

Objectives of the MLI

The MLI is one of the outcome of the negotiations implementing Base Erosion and Profit Shifting (so called “BEPS”) measures allowing their swift transposition into all existing double tax treaties worldwide. The aim is to avoid the abusive use of double tax treaties or the benefit of their provisions in abusive structures. The MLI was concluded among all participating countries. Each country has a series of options to opt for.

The main provision of the Luxembourg version of the MLI is the principal purpose test (“PPT”) provision, which is a minimum standard applicable to all “covered tax treaties”. Indeed, Luxembourg has decided to apply the minimum standards only. Under the PPT, a contracting State can deny the application of a tax treaty if one of the principal purposes of an arrangement or transaction is the benefit of the provisions of the treaty.

Business purposes have thus to exist to allow the benefit from tax treaties, excluding de facto letterbox companies or conduit vehicles.

Timeline

- June 2017: Signature of the MLI by Luxembourg. At this occasion, 81 tax treaties were listed to be updated for Luxembourg.

- 1 July 2018: Entry into force of the MLI following the deposit of the ratification instrument by 5 countries.

- 3 July 2018: Publication by Luxembourg of the ratification bill.

- 14 February 2019: Luxembourg Parliament passed the law on the ratification of the MLI into Luxembourg domestic tax law.

- 9 April 2019: Deposit by Luxembourg of its instrument of ratification with the OECD.

- 1 August 2019 (expected): Entry into effect of the MLI in Luxembourg (i.e. expiration of the 3-months period).

Effective application in Luxembourg

The entry into effect of the MLI provisions for each double tax treaty will depend on the entry into force of the MLI in the other country and on the type of taxes concerned:

- Withholding taxes: If the MLI enters into force in Luxembourg on 1 August 2019 (as expected), the withholding tax provisions should apply by 1 January 2020; and

- Other taxes: If the MLI enters into force in Luxembourg on 1 August 2019 (as expected), the MLI provisions should apply by 1 February 2020 (i.e. after the expiration of the 6-month in the other country).

The effective applicability of the MLI must thus be analyzed on a case-by-case basis, considering the below :

- the MLI must be in force and effectively applicable in Luxembourg and in the other country;

- the relevant tax treaty must be listed as “covered tax agreement” by both countries;

- the reservations and optional provisions made by both countries must be analyzed and matching for the MLI to apply to a given treaty.

MLI Treaty partners (i.e. ratification instrument deposited)

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.

Concluding remarks

The exact date of application of the MLI matching provisions to all relevant double tax treaties will need to be analyzed on a case by case basis depending on the status of the ratification process in the other country.

This also means that tax treaties signed by Luxembourg with countries that have not signed the MLI (e.g. the United States) or completed the ratification procedure will not be affected by any MLI provisions until they have completed the process. The same conclusion should apply in case where Luxembourg and a other country have opted for incompatible options.

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