1. Getting access to Luxembourg’s tax treaty network going forward
BEPS and the MLI:
Getting access to Luxembourg’s tax treaty network going forward
Jacques Wantz, Senior Associate
4 April 2017

2. Getting tax treaty access – status quo
Luxembourg residence certificate
Typically required to get treaty access
Well established practice by Luxembourg tax authorities
Challenges
Domestic anti-abuse provisions
In Luxembourg (abuse of law)
In other contracting State (beneficial ownership provisions, anti-tax avoidance measures
Restrictive treaty provisions
Impact of OECD BEPS project

3. The Luxembourg-Russia tax treaty
Article 4, residence
Tie-breaker clause foresees mutual agreement procedure - place of effective management located where:
board meetings are usually held,
senior day-to-day management is carried on, and
managers usually exercise their functions
Article 10, dividends
Reduced withholding tax rates on dividends only available if recipient is beneficial owner thereof.
Article 29, limitation of benefits
No treaty benefits if main purpose (or one of main purposes) for creation or existence of beneficiary was to obtain treaty benefits.

4. OECD BEPS project – Overview1
15 actions covering virtually all traditional international tax issues 2
Final BEPS Reports released in October 2015 3
Implementation of action points by
National laws: Measures may potentially be implemented/interpreted differently in various jurisdictions
Changes to tax treaties by way of multilateral instrument (action point 15) 4
Already measures labelled as BEPS measures by many countries (e.g. French interest deduction ceiling rules) 5
EU level: Parent-Subsidiary Directive, Anti-tax avoidance directive

5. MLI – Implementation of tax treaty related BEPS measures
Multilateral convention entered into by all jurisdictions implementing BEPS
Covers all tax treaty related measures in BEPS package (hybrid mismatches, treaty abuse, artificial avoidance of PE, improving dispute resolution)
MLI provisions to be applied alongside existing tax treaties (“in place of” or “in absence of” or “modifying” existing provisions)
Possibility to opt out from provisions (reservations)
Covered Tax Agreements: Contracting jurisdictions list treaties to which MLI applies
Large discretion left to bilateral relations

6. Illustration of the MLI mechanism
RU-LUX MLI
Russia’s MLI
Luxembourg’s MLI
Russia – Luxembourg DTT
Russia
Luxembourg

7. Implementation of BEPS Action 6 (treaty abuse)
Change to preamble: tax treaties may not be used to achieve double non-taxation
In addition, choice to adopt either of:
PPT only;
PPT + simplified/detailed LOB; or
detailed LOB + other anti-conduit measures
MLI does not include detailed LOB
PPT: A treaty benefit must be denied where:
one of the principal purposes of an arrangement is to secure a benefit under a treaty; and
granting such benefit would be contrary to the object and purpose of the relevant provisions of the treaty

8. BEPS Action 6 – Treaty abuse
The CIV/non-CIV distinction in OECD materials
CIVs
Widely held, diversified portfolio, regulated (UCITS)
Conclusion in 2010 Report on treaty access by CIVs
Less concerns about treaty abuse by CIVs (individual tax planning not possible, as widely held)
NON-CIVs
Alternative investment funds (AIF), including private equity funds
Concerns from governments that non-CIV funds are used to
provide treaty benefits to investors which they could not have obtained themselves
defer recognition at investor level of income on which treaty benefits have been granted

9. BEPS Action 6 – Treaty abuse
Progress on the non-CIV discussion
24 March 2016
Consultation paper on treaty access for non-CIVs published - work in progress
2015 Final Report on Action 6 on non-CIVs:
« OECD recognises the economic importance of these funds and the need to ensure that treaty benefits be granted where appropriate »
6 January 2017
Discussion draft with examples

10. OECD examples: Regional investment platform (1/2)
Scenario
HoldCo acts as regional investment platform for Fund
Acquires and manages portfolio of private market investments
Regulated Fund
HoldCo
Investors
Sub 1
Sub 3
Sub 2
State S
(EU country)
State R (Luxembourg)
State T (anywhere)
100%
Dividend WHT
10%
Dividend WHT 30% no treaty
5% with treaty
Drivers for HoldCo in State R
Managers with knowledge of regional business practices and regulations
Skilled multilingual workforce
State is member of regional grouping with common currency (EU)
Extensive tax treaty network

11. OECD examples: Regional investment platform (2/2)
Activities and functions of HoldCo
Management team: majority of residents/expertise in investment management
Reviews Fund’s investment recommendations
Approves and monitors investments
Carries on treasury functions
Maintains books and records
Ensures compliance with target state regulations
Regulated Fund
HoldCo
Investors
Sub 1
Sub 3
Sub 2
State S
(EU country)
State R (Luxembourg)
State T (anywhere)
100%
Dividend WHT
10%
Dividend WHT 30% no treaty
5% with treaty
Tax benefit sought
Reduced WHT on dividends under State S/State R tax treaty
Result: Not reasonable to deny treaty access

12. OECD examples: Securitisation company (1/2)
Scenario
Bank sets up SeCo and transfers portfolio of loan receivables
SeCo fully debt financed
Notes listed and held through a clearing system
Widely held by third party investors
Bank retains small portion of notes to comply with regulatory requirements
Investors
Bank
State T (anywhere)
Notes
Risk retention
1 share
Trustee
Securitisation
Company
Drivers for SeCo in State R
Robust securitisation framework and legislation
Skilled and experienced personnel and support services
Extensive tax treaty network
Loan receivables
State R (Luxembourg)
State S (EU countries)
WHT 30% no treaty
10% with treaty
Interest
SMEs

13. Securitisation company (2/2)
Specific circumstances
Investors’ decision to invest not driven by specific underlying investment
SeCo’s investment strategy not driven by investor tax position
Investors
Bank
State T (anywhere)
Notes
Risk retention
Tax benefit sought
Reduced WHT on interest under State S/State R tax treaty
1 share
Trustee
Securitisation
Company
Same benefit available under State S/State T tax treaty !
Loan receivables
State R (Luxembourg)
State S (EU countries)
WHT 30% no treaty
10% with treaty
Interest
Result: Not reasonable to deny treaty access
SMEs

14. OECD examples: Immovable property fund (1/2)
Scenario
Regulated manager
Institutional Investors
Tax transparent RE Fund with regulated manager
Holds portfolio of RE assets in specific region (EU)
All investments made via HoldCo, which provides debt and equity financing to PropCos
Tax transparent LP
State C (anywhere)
Drivers for HoldCo in State R
HoldCo
Political stability
Regulatory and legal systems
Lender and investor familiarity
Qualified personnel
Extensive treaty network
Loan
Loan
Loan
State R (Luxembourg)
State S
(EU country)
PropCo 1
PropCo 2
PropCo 3
Loans
Bank

15. OECD examples: Immovable property fund (2/2)
Activities and functions of HoldCo
Protects Fund from liability
Facilitates internal/external debt financing
Facilitates making, managing and disposal of investments
Administers claims for WHT relief for all applicable tax treaties
Regulated manager
Institutional Investors
Tax transparent LP
State C (anywhere)
Tax benefit sought
Access to tax treaties between State R and S States
HoldCo
Loan
Loan
Loan
State R (Luxembourg)
State S
(EU country)
HoldCo tax position not better than investor tax position for direct investment !
PropCo 1
PropCo 2
PropCo 3
Loans
Result: Not reasonable to deny treaty access
Bank

16. Contacts Jacques Wantz Senior Associate Luxembourg
Mob:

17. Questions?
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