On 9 April 2019, Luxembourg deposited with the OECD its instrument of ratification for the Multilateral Instrument (“MLI”). What this means in practice for the entry into force of the MLI provisions with respect to tax treaties concluded by Luxembourg is explained below.
Entry into force
The MLI will enter into force in Luxembourg on the first day of the month following the expiry of three calendar months after Luxembourg deposited with the OECD its instrument of ratification for the MLI. As Luxembourg deposited its instrument of ratification on 9 April 2019, the three calendar months will expire on 9 July 2019. This means that the MLI will enter into force in Luxembourg on 1 August 2019 (the first day of the month after 9 July 2019).
The date of the entry into force of the MLI is relevant for determining when the MLI provisions will enter into effect with respect to so-called covered tax agreements (i.e. tax treaties that a country wants MLI to cover).
Entry into effect
As regards the date that the MLI provisions will enter into effect, there is a distinction between (i) taxes withheld at source and (ii) all other taxes.
Taxes withheld at source
The provisions of the MLI will enter into effect with respect to taxes withheld at source where the taxable event (e.g. payment of dividends, interest or royalties) occurs on or after the first day of the next calendar year after the MLI has entered into force in both tax treaty countries.
As mentioned above, the MLI will enter into force in Luxembourg on 1 August 2019. Provided the MLI has also entered into force during 2019 in the other tax treaty country, payments of dividends, interest or royalties as from 1 January 2020 will be covered by the MLI provisions.
For example, reduced withholding tax rates under a tax treaty on dividends, interest or royalties paid to a Luxembourg company on or after 1 January 2020 may be denied by the source country by virtue of the principal purpose test of article 7 MLI if obtaining that benefit was one of the principal purposes of the transaction and granting that benefit in the given circumstances is not in line with the object and purpose of the tax treaty.
All other taxes
The provisions of the MLI will enter into effect for all other taxes for taxable periods beginning on or after the expiry of six calendar months after the MLI has entered into force in both tax treaty countries.
The MLI will enter into force in Luxembourg on 1 August 2019. Provided the MLI has also entered into force by 1 August 2019 in the other tax treaty country, the MLI provisions will enter into effect for all other taxes for taxable periods beginning on or after 1 February 2020. This means that for companies whose tax year coincides with the calendar year, the MLI provisions for all other taxes will, in principle, only become effective from the tax year 2021 at the earliest.
Note, however, that tax treaty countries can apply a period shorter than six calendar months, in which case they must notify the OECD of such intention.
Matthijs Haarsma, Senior Associate, Luxembourg, matthijs.haarsma@cms-dblux.com
