The OECD’s Multilateral Instrument Convention (“MLI”), which was signed in Paris on June 7th 2017, has been adopted by the Luxembourg parliament on February 14th 2019 (draft bill No. 7333), signed on March 7th 2019 and deposited with the OECD on April 9th 2019, which means that Luxembourg has now finalized the ratification process of the MLI and that its provisions will enter into force on August 1st 2019. As at April 9th 2019, the MLI has also been ratified by 24 other jurisdictions.
As a reminder, the MLI’s aim is to enable rapid changes to Double Tax Treaties (“DTT”) in a synchronised manner, without requiring long bilateral negotiations between jurisdictions. The MLI provides for a set of amended provisions, which, once applicable, are mainly aimed at limiting a taxpayer’s entitlement to benefit from a DTT (e.g. by restating the preamble of the DTT and including a principle purpose test). In terms of procedure, the MLI becomes applicable to a particular DTT when both jurisdictions concerned ratified the MLI and both included the specific DTT within the scope of the MLI. Luxembourg has decided to include 81 DTTs in the MLI, from a total of 83 DTTs it currently has in force.
In theory, the MLI can impact the following aspects of a DTT, depending on whether the choices expressed by both jurisdictions in their ratification instruments match:
- Improved mutual agreement procedure, dispute resolution and cooperation;
- Limitation of mismatches arising for tax transparent entities and hybrid mismatches;
- Tightening of the methods used for the avoidance of double taxation;
- Tightening of the collection mechanism of withholding taxes;
- Specific rules for the taxation of share disposal regarding real estate rich companies;
- Anti-abuse provision for establishments located in third jurisdictions;
- Taxation rights of a jurisdiction on its own tax resident;
- Tackling artificial permanent establishment status;
- Cooperation between jurisdictions on the adjustment of profits of affiliated undertakings;
- Improvement of the arbitration procedure.
In order to assess the effective impact of the MLI on a specific DTT, one will thus have to review if the ratification´s process in the other jurisdiction involved has been finalised, if the specific DTT is covered therein as well as the options and reservations expressed by both jurisdictions to find matching ones. The effective starting date of application of the MLI provisions with respect to a specific DTT will depend on the type of taxes concerned, withholding taxes or other taxes, and will generally start on the first day of the next calendar year or after a six month period respectively starting from the latest of the dates on which the MLI enters into force for the jurisdictions covered by the DTT, unless agreed otherwise. In order to facilitate the overview, the OECD is releasing updates on the advancement of the ratification process in each jurisdiction part of the MLI as well as an MLI matching database.