On November 5, 2019, the UK Government released the synthesized text of the Luxembourg-UK double tax agreement, as modified by the BEPS multilateral instrument.
The BEPS MLI, developed through negotiations involving more than 100 countries and jurisdictions as part of the OECD's BEPS project, is intended to enable countries to incorporate BEPS-related amendments into their tax treaties without having to renegotiate bilateral treaties on a piecemeal basis - a process that could take more than a decade to achieve.
The treaty amendments are intended to counter hybrid mismatch arrangements, which can result in double non-taxation or double deductions for the same income, and treaty abuse. In addition, provisions are added to prevent the avoidance of permanent establishment rules and they are intended also to improve dispute resolution, with some countries additionally adopting an optional provision on mandatory binding arbitration.
The updated Luxembourg treaty includes the new preamble that precludes the double tax treaty from being used by taxpayers to derive tax benefits in inappropriate circumstances, such as through treaty shopping, or to use the treaty to achieve double non-taxation.
It includes strengthened provisions for Mutual Agreement Procedure resolution in the case of double tax disputes, and includes new provisions on corresponding adjustments to tackle transfer pricing abuse, to enable the tax authorities to adjust transfer prices to achieve arm's length results.
The modifications made by the MLI are effective in respect of the 1967 Luxembourg-UK Double Taxation Convention for:
- taxes withheld at source on amounts paid or credited to non-residents, from January 1, 2020;
- Corporation Tax, from April 1, 2020;
- Income Tax and Capital Gains Tax, from April 6, 2020; and
- all other taxes levied by Luxembourg, for taxable periods beginning on or after February 1, 2020.