Luxembourg Tax Update: MLI, Exchange of Information, Tax Treaty with France and 2019 Budget Bill

Allen & Overy LLP

​The law dated 7 March 2019 approving the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or MLI) was published in the Luxembourg Mémorial on 14 March 2019.

In addition, the law dated 1 March 2019 amending the procedure applicable in case of exchange of information on request was published in the Luxembourg Mémorial on 5 March 2019. Finally, the new France/Luxembourg tax treaty was ratified by France in February 2019 and the Luxembourg 2019 Budget Bill was introduced in the Luxembourg Parliament.

1. MLI

As a reminder, the MLI applies in place of existing tax treaties entered into by the relevant State and modifies the provisions of the tax treaties that have been defined as ‘Covered Tax Agreements’ by the latter. As regards Luxembourg, 81 tax treaties were listed as ‘Covered Tax Agreements’ at the time of signature of the MLI by Luxembourg in June 2017. The main provision of the MLI impacting the existing tax treaties is the principal purpose test (PPT) provision, which is a minimum standard applicable to all covered tax treaties. Under the PPT, a contracting State can deny the application of a tax treaty (e.g. withholding tax exemption/reduction), where one of the principal purposes of an arrangement or transaction is to benefit from the treaty. The PPT is an anti-abuse provision to counter aggressive structures implemented without business purposes to benefit from tax treaties involving inter alia companies which do not have appropriate substance (e.g. letterbox companies, conduit vehicles).

The entry into force of the MLI is still subject to the deposit by Luxembourg of its instrument of ratification with the OECD. Once this has been done, the MLI will enter into force on the first day of the month following the expiration of a 3-month period. Assuming the deposit occurs before the end of March 2019, the MLI will be in force in Luxembourg on 1 July 2019. The effective application (i.e. ‘entry into effect’) of the MLI provisions to taxes is however deferred as follows:

  • regarding withholding taxes, to 1 January of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the contracting States - i.e. assuming the MLI enters into force in Luxembourg on 1 July 2019, the withholding tax provisions are applicable as of 1 January 2020 provided that the MLI enters into force before the end of 2019 in the other contracting State; and
  • regarding other taxes levied, with respect to taxable periods (or calendar year) beginning on or after the expiration of a 6-month period from the latest of the dates on which the MLI enters into force for each of the contracting States - i.e. assuming the MLI enters into force in Luxembourg on 1 July 2019, the 6-month period ends on 31 December 2019, meaning that the MLI provisions should not apply prior to 1 January 2020 (since the Luxembourg taxable year follows the calendar year) and are applicable only where the 6-month period has also expired in the other contracting State at the end of 2019 (assuming the taxable period corresponds to the calendar year in the other contracting State).

The effective applicability of the MLI must thus be checked on a case-by-case basis, depending on the other contracting State, and is subject to the following steps:

  1. the MLI must be in force in Luxembourg and in the other contracting State;
  2. the relevant tax treaty must be listed as ‘Covered Tax Agreement’ by both contracting States;
  3. the reservations and optional provisions made by both contracting States must be checked;
  4. the MLI provisions must have effect/be effectively applicable in each contracting State.

As of today, 87 countries are signatories and parties to the MLI, which is in force in a dozen countries, such as Australia, France, Jersey, Isle of Man, Singapore, Sweden, the United-Kingdom.

2. Exchange of Information on Request

Further to the decision of the Court of Justice of the European Union of 16 May 2017 (Berlioz case, C-682/15), the Luxembourg law dated 25 November 2014 regarding the procedure applicable to the exchange of information on request in tax matters has been amended to state inter alia that the holder of the information is entitled to challenge i) the legality of the administrative decision directing him to provide information pursuant to Directive 2011/16 on the exchange of information between tax authorities, and ii) the amount of the penalty when an administrative penalty has been imposed to him for failure to comply with the decision requesting the information. The appeal is subject to a specific and expedited procedure. The appeal, which has a suspensive effect, must be introduced before the Administrative Tribunal within the month following the notification of the decision to the holder of the information and the decision of the Administrative Tribunal can be appealed before the Administrative Court within 15 days following the Tribunal’s decision. 

3. Tax Treaty with France   

The new double tax treaty (DTT) signed by France and Luxembourg in March 2018 has recently been ratified by France. The Luxembourg law approving the DTT should be passed by the Luxembourg Parliament in the coming months. The DTT should enter into force in the course of 2019 and thus apply as from 1 January 2020. Please refer to our Newsletter of 21 March 2018 for further information.
 

4. New 2019 Budget Bill

As announced in our Newsletter of 20 December 2018, an additional 2019 Budget Bill was introduced in the Luxembourg Parliament on 5 March 2019 to allow Luxembourg taxpayers to opt for the application of the interest limitation rule at the level of a tax unity (for accounting year starting as at 1 January 2019). In addition, as from tax year 2019, the maximum corporate income tax rate should be reduced from 18% to 17% applicable to taxable profits above EUR 200,000 (decreasing the global corporate tax rate for Luxembourg-City to 24.94%). Finally, e-books should now be subject to the reduced 3% VAT rate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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