Loyens & Loeff

Luxembourg starts ratification procedure for the MLI

On 3 July 2018 the Luxembourg government submitted the bill for ratification of the Multilateral Instrument (“MLI”) to parliament. The positions taken on the MLI do not deviate from the provisional list of choices and reservations notified by Luxembourg to the OECD in June 2017. The explanatory note to the bill contains a summary of the various MLI provisions, as well as a brief clarification of the choices made by Luxembourg.

Luxembourg signed the MLI in June 2017 and notified all its 81 double tax treaties (“DTTs”) in force at that time. Based on the  choices of its treaty partners (in most cases, still provisional), Luxembourg currently expects 62 of its DTTs to be affected by the MLI. The bill does not mention the Luxembourg DTTs that entered into force since June 2017 (such as the DTT with Cyprus). 
As to the MLI provisional choices, Luxembourg adopted a conservative approach. Apart from certain compulsory provisions tackling treaty abuse scenarios, such as the so-called principal purpose test, Luxembourg accepted only a few optional rules. It intends to opt for part of the provision on hybrid mismatches as well as the provision addressing the artificial avoidance of a permanent establishment through the specific activity exemption. On the other hand, Luxembourg made several reservations on other MLI provisions, such as those on dual resident entities, real estate-rich companies and dividend transfer transactions. Luxembourg also chose to apply provisions on mutual agreement procedures and mandatory binding arbitration in order to improve dispute resolution in tax matters. The provisional list of choices is still subject to potential changes pending the parliamentary approval.
The explanatory note to the bill confirms that the earliest possible date of the MLI provisions coming into effect for any particular DTT are, for companies whose fiscal year coincides with the calendar year: (i) on 1 January 2019 for taxes levied at source and (ii) on 1 January 2020 on the other taxes covered by the relevant DTTs. For these dates to apply, both treaty partners in respect of a certain DTT need to complete the ratification process by the end of September 2018 in relation to taxes levied at source and by the end of March 2019 in relation to the other taxes. At the moment it is uncertain whether Luxembourg will ratify (by enacting the current bill of law) before these dates.

More info
For more information on the MLI, including an overview of the preliminary MLI choices made by Luxembourg, as well as those made by Belgium, the Netherlands and Switzerland in relation to each of their major tax treaty partners, we refer to our website.