Luxembourg has just signed the OECD-sponsored Multilateral Convention to implement tax treaty related measures to prevent BEPS. Therefore, the Grand-Duchy becomes one of the 68 countries in the first group of signatories to take this key step towards implementing the OECD/G20 BEPS Project. Once Luxembourg and its co-signatories go on to ratify the Multilateral Convention – but not until then – tax treaties will be amended in several important areas. Let’s examine what this means for Luxembourg financial players.
What the BEPS agreement means for Luxembourg
BEPS is a revolution for international taxation. Measures to curb tax treaty shopping are arguably the key “minimum standard” of the whole OECD/G20 BEPS Project. The Multilateral Convention introduces into tax treaties an entire, but short, new article, which limits the scope of treaty benefits. It does this by imposing a “Principal Purposes Test”. This test provides simply that a treaty benefit is not to be granted, if obtaining that benefit was one of the principal purposes of any arrangement. So, only arrangements that are made for valid commercial reasons, and that are supported by real operational activity, are going to be entitled to all the benefits of tax treaties, such as exemptions that prevent double taxation, or which reduce or eliminate withholding tax burdens.
Luxembourg has chosen to include a mechanism that allows competent authorities the discretion to grant treaty relief in appropriate cases, even if the Principal Purposes Test is strictly in point. We think this is a positive and pragmatic choice.
All in all, transposing this Convention is complex as its provisions offer multiple options – not all of the measures in the Convention have to be applied by every signatory. Now, the OECD has to examine what options the countries have chosen, and harmonise it all.
By choosing to apply one significant optional part of the Convention, Luxembourg has confirmed that it is one of around 20 “early adopter” countries that support the use of the process of “mandatory binding arbitration” as the most efficient way to resolve international tax disputes. Again, this is a positive move.
What we think
Financial sector players need to bring even more substance to Luxembourg. In practice, companies will have to monitor tax changes. And, this means hiring tax compliance officers and investing in technology.
As for attractiveness, Luxembourg has to reduce its tax rates, both its corporate income tax and dividend withholding tax.
To get more details on what is at stake, read our News Flash.