On February 22nd 2019, the Luxembourg tax authorities published a Circular (the “Circular”) providing guidelines as to the new rules applicable to permanent establishments (“PE”). Further to the domestic legislative changes in the context of the BEPS project, the Luxembourg law definition of a PE has been amended and introduced a requirement for taxpayers to provide the Luxembourg tax authorities with a certificate assessing the existence of a PE in certain cases (please refer to our June 2018 newsletter article for more).
With regards to the amended definition of a PE, the Circular elaborates on the criteria that must be used in determining the existence of a PE. In the case of a country with which Luxembourg has concluded a double tax treaty, only the criteria from such double tax treaty apply. However, when the double tax treaty does not provide for criteria that allow clearing up divergences as to the existence of a PE, the Circular specifies that an activity will generally give rise to a PE if it is pursued independently and forms part of the general economic landscape of a country. The taxpayer bears the burden of proof in this regard.
Further the Circular addresses the certificate that taxpayers must henceforth provide as to the existence of a PE. The Circular differentiates between those cases in which a certificate must always be provided and those cases in which a certificate must only be provided following a request by the tax authorities. The certificate must always be provided in case the double tax treaty does not include a clause comparable to Article 23 A (4) of the OECD Model Tax Convention (“OECD MTC”) (i.e. the right to not exempt an income which the other contracting state refrains from taxing due to its interpretation of the double tax treaty). On the contrary, a certificate proving the existence of a PE is only to be filed with the tax authorities upon request absent such a clause in the considered double tax treaty.
Attention should be paid to the definition of PE under the double tax treaties in light of the OECD’s Multilateral Instrument (“MLI”) as entered into force on 1st of July 2018. In this respect, Luxembourg expressed reservations to all the MLI provisions dealing with the definition of PE except the provision relating to specific activity exemptions. In that respect, Luxembourg has notified that it will adopt Article 13(1) option B of the MLI which reproduces the pre-existing wording of Article 5 paragraph 4 of 2014 OECD MTC (i.e. definition of PE). MLI provisions will modify existing tax treaties if both treaty partners have listed the treaty as a “Covered Tax Treaty” and have affirmatively chosen to apply the same option.
Finally, regarding the other modifications to the PE definition introduced by the 2017 OECD MTC, Luxembourg expressed formal reservations to the modifications to Article 5 paragraph 4.1 (specific activity exemption) and Article 5 paragraph 5 and 6 (commissionaire arrangements).