The new Circular released by the Luxembourg tax administration on August 28th 2017 clarifies the modalities of the «Mutual Agreement Procedure» foreseen by double tax treaties entered into by Luxembourg and which are based on Article 25 of the OECD Model Tax Convention.
Scope of application
The Mutual Agreement Procedure (“MAP”) applies in three cases:
- a disagreement between the tax administration and a taxpayer, who considers that the action of one or both of the contracting States results, or will result, in taxation for such taxpayer which is not in accordance with the provisions of the relevant double tax treaty;
- difficulties or doubts arising as to the interpretation or application of a double tax treaty requiring a common action of the contracting States;
- the contracting States want to consult with each other for the elimination of double taxation in cases not provided for in the double tax treaty.
The MAP is also available when anti-abuse provisions deriving from a double tax treaty or national legislation are applied by a contracting State and it shall apply for transfer pricing issues (adjustment of intra-group transactions or income allocation to a permanent establishment).
The MAP is subject to two conditions: the request must be submitted within the time-limit (i.e. three years as from the first notification of a tax assessment, a tax base or a tax audit) and the applicant must be tax resident in Luxembourg.
In practice, the application for a MAP must be addressed to one of the three subdivisions of the «Direction of Luxembourg Inland Revenue»: the «Executive Committee» for all the mutual agreement procedures, the «Economic Division» for matters related to transfer pricing and the «Division for International Relations» for all other matters. The competent authority for procedures related to discrimination will depend on the nationality of the taxpayer.
The request for a MAP does not entitle the tax payer to submit a demand for deferral of tax payment. Such a request is only possible if a tax claim is introduced. The MAP gives, however, a chance to taxpayers to avoid the statute of limitation for some tax claims. Further, it provides additional remedies for taxpayers during a tax audit.
In practice, the mutual agreement procedure is mostly relevant for taxpayers involved in transfer pricing issues or taxation of permanent establishments. Indeed, it enables taxpayers to obtain a tax adjustment in two jurisdictions simultaneously. In the future, the recourse to the mutual agreement procedure may be more frequent, especially with the introduction of the «principle purpose test» in the double tax treaties by mean of the Multilateral Instrument (“MLI”) which covers the treaty related issues of the base erosion and profit shifting reports.