On 11 March 2021, the Luxembourg Tax Authorities updated Circular L.G. Conv. D.I. n°60 (Circular) on the application of the mutual agreement procedure (MAP). Set forth under Article 25 of the Organisation for Economic Co-operation and Development Model Tax Convention (OECD Model Convention) and included in the various double taxation treaties (DTTs) signed by Luxembourg, the MAP aims to provide a mechanism to resolve, by means of a non-judicial procedure, cross-border tax disputes arising from the interpretation or application of a DTT provision.
It should be noted that the Circular does not cover proceedings based on the Law of 20 December 2019 transposing Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union (EU).1
The Circular details the mechanism of the MAP from the request to initiate the procedure to the termination of the MAP and explains the interaction with other procedures and legal remedies.
Scope of the MAP
The MAP is a non-judicial procedure that is independent of domestic legal remedies. Its purpose is to eliminate legal and economic double taxation without creating situations of double non-taxation. The competent authorities try to resolve cases of double taxation without any obligation to achieve a result, unless a DTT provides for recourse to the arbitration procedure.
The MAP is based on specific provisions of DTTs, which are in most cases identical or comparable to Article 25 of the OECD Model Convention, which apply where:
Taxpayers disagree with tax authorities on their tax situation as they consider that the measures taken by one or both Contracting Parties to the DTT result or will result in taxation not in accordance with the provisions of the DTT - in such case, the MAP is requested by the taxpayer.
The interpretation or application of a DTT raises doubts or difficulties – the aim of such MAPs is to provide useful guidance, generally published in Luxembourg through an administrative Circular, to taxpayers in order to prevent further disputes.
The competent authorities wish to consult each other for the purpose of eliminating double taxation in cases not provided for in a DTT.
Some of the DTTs concluded by Luxembourg contain a provision establishing a compulsory and binding arbitration procedure to settle disputes that the competent authorities have not managed to resolve within the time limit set by the DTT. The modalities for the application of the arbitration procedure are settled by mutual agreement between the competent authorities of the Contracting States. In addition, the Multilateral Convention on the Implementation of Tax Treaty Measures to Prevent Base Erosion and Profit Shifting (MLI), signed on 17 June 2017, introduces a binding arbitration procedure, including the applicable operating rules, in a significant number of the DTTs concluded by Luxembourg.
The sections below describe the procedure applicable to a MAP that is requested by a taxpayer who considers that the actions of one or both of the Contracting States to a DTT result or will result in taxation that is not in accordance with the provisions of such DTT. This implies that an administrative intervention has taken place that may result in immediate taxation or future taxation sufficiently precise to allow the competent authorities to assess the risk of it not being in line with the DTT.
In Luxembourg, such administrative intervention would, for example, be the notification of a tax assessment establishing the amount of tax to be paid or the amount of income that is subject to tax, or the audit of a taxpayer where it is likely that the audit will result in taxation not in accordance with the DTT.
Access to the MAP
The Circular states that the access to the MAP is intended to be very broadly applied. As a result, access should only be refused if the time limit for initiating a MAP is exceeded (see next section) or if the residence criterion is not met in cases where the provision with respect to the MAP provided by a determined DTT stipulates that the taxpayer must submit his case to the competent authority of the Contracting State of which he is a resident.
Where access to the MAP is denied, the taxpayer will be informed and a notification will be made to the other competent authority, stating the reasons for the decision.
The Circular also provides for some clarifications with respect to certain specific cases. For instance, it is confirmed that multilateral MAPs are possible, provided that there is a DTT with a provision on MAP between each of the countries concerned. A MAP may also be initiated by a resident company to defend the interests of a permanent establishment it has in a third State that is not party to a given DTT. In such cases the competent authority may delegate negotiating competence to the State of the permanent establishment, essentially in situations where only the State of the permanent establishment is concerned with a taxation contrary to the DTT.
The Circular also confirms that access to the MAP will not be refused on the sole ground that the MAP is initiated as a result of the application by the tax authorities of anti-abuse provisions set forth either in a tax treaty or in domestic law. Access to the MAP will also not be refused for the sole reason that the request for a MAP results from the fact that the taxpayer has accepted, following a settlement in the context of a tax audit, the adjustments that are the subject of the request for the MAP.
Interest and penalties are not treated in Luxembourg as taxes covered by a DTT and therefore fall outside the scope of a MAP.
Initiation of the MAP
To initiate a MAP, a written request has to be sent to the competent authority of the State of residence of the taxpayer (in Luxembourg, the Minister of Finance or his authorized representative), unless the provisions of the relevant DTT allow the request to be made to either competent authority.
Reference should be made in each case to the respective DTT provision, where applicable as amended by the MLI.
The OECD Model Convention in its 2017 version provides that the taxpayer must submit its request for the initiation of a MAP within three years from the first notification of the measure that results or will result in taxation that is not in accordance with the provisions of the DTT. Although many of the DTTs concluded by Luxembourg contain a time limit of three years after the MLI takes effect, it is still important to consult the respective DTT or the synthesized texts provided by the tax authorities in order to determine the exact deadline applicable in each case. As per the Circular, the triggering of this deadline should be interpreted in the least restrictive way possible for the taxpayer.
A taxpayer who wants to wait for a procedure initiated under domestic law to be decided before the competent authorities enter into discussions to resolve the case presented, may make a “protective” request for a MAP (which needs to be described as such). “Protective” MAP requests only have the effect of ensuring that the time limit set out in the applicable DTT is respected; the request will not be considered until the competent authority is notified to proceed with the examination.
The Circular lists the information and the documents to be submitted together with the MAP request. If needed, the Luxembourg competent authority may ask for additional information or documents to be provided within a determined deadline. If the taxpayer fails to provide the information within the required period, the MAP request may be refused.
Conduct of the MAP
There are two levels in the MAP - domestic and international. First, on a domestic level, the Luxembourg competent authority will evaluate if the taxpayer’s request is admissible. If this is the case, it will then analyze if it can unilaterally decide on the request; this is the case if the action leading to taxation that is non-compliant with a DTT has been taken by the Luxembourg taxation authorities. In such situations, the competent authorities will request that the competent tax office proceed with the required adjustments, reassessments or reliefs as soon as possible. If the Luxembourg competent authority considers it to be useful, it may exchange views and information with the other competent authority.
If the Luxembourg competent authority cannot resolve the issue unilaterally, it must contact the competent authority of the other State in order to resolve the issue by mutual agreement. It should be noted that, except in specific cases where the DTT provides for a binding mandatory arbitration procedure, the competent authorities are not required to come to a conclusion; their role is to endeavor to find a satisfactory solution.
The competent authority will inform the taxpayer of the outcome of the procedure in writing.
Implementation of a solution proposed to the taxpayer
If an agreement is reached between the competent authorities resulting in a modification of the taxation in Luxembourg, the implementation of the agreement will be subject to the approval of the taxpayer who requested the MAP and to the waiver by said taxpayer of all legal remedies, both in Luxembourg and abroad, in relation to the matter settled in the agreement. These conditions apply both to solutions that provide for unilateral relief and to agreements between competent authorities.
The agreement will apply regardless of Luxembourg domestic deadlines as far as downward adjustments or reassessments are concerned. However, upward adjustments or reassessments are only possible within the time-limits prescribed by domestic law (i.e., 5 years, respectively 10 years in certain cases).
It should be noted that the cancellation or the downward adjustment of a taxation in Luxembourg following a MAP also generally triggers the cancellation or the proportional adjustment of any interest or penalties that are incidental to this taxation.
Where the DTT does not provide for a binding arbitration in the MAP, the competent authorities have the possibility to terminate the MAP without reaching an agreement so that the double taxation is not eliminated.
Interaction with domestic remedies
Since the MAP is a non-judicial procedure independent of existing domestic remedies, a taxpayer can initiate a MAP based on a DTT and, at the same time, exercise the right to domestic administrative and judicial remedies.
If the competent authorities reach an agreement before a decision has been taken under Luxembourg domestic administrative or judicial remedies, the execution of the agreement reached will be subject to the condition that the taxpayer withdraws any domestic appeal. If a final domestic judicial decision is delivered before an agreement has been reached by the competent authorities in the MAP, the Luxembourg competent authority can still continue the MAP but it must take into account the outcome of the judgment and cannot aggravate the taxpayer’s situation.
A taxpayer may also simultaneously request the opening of a MAP based on a DTT, following this Circular, and on the European Arbitration Convention. In this case, each procedure is conducted according to its own rules.
The filing of a complaint in the framework of the Law of 20 December 20192 establishing a tax dispute resolution mechanism, between Luxembourg and other EU Member States, puts an end to any other ongoing MAP or dispute resolution procedure dealing with the same dispute and initiated under an agreement or a DTT.
It should be noted that no stay of execution can be granted to a taxpayer in the case of a MAP, since such a stay of execution is limited to cases where an appeal against a tax assessment has been introduced by the taxpayer.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Advisory Services Sarl, Luxembourg City
Bart Van Droogenbroek, Tax Leader
Marc Schmitz, Tax Policy & Controversy Leader
Olivier Bertrand, Private Equity Tax Leader
Dietmar Klos, Real Estate Sector Leader
Fernando Longares, TMT & Life Science Tax Leader
Christian Schlesser, Commercial and Public Sector Tax Leader
Jacques Linon, Banking & Insurance Tax Leader
Vincent Rémy, Wealth & Asset Management Tax Leader
Nicolas Gillet, Transfer Pricing Leader
Elmar Schwickerath, Global Compliance and Reporting Leader
Ernst & Young LLP (United States), Luxembourg Tax Desk, New York
Ernst & Young LLP (United States), Luxembourg Tax Desk, Chicago
Alexandre J. Pouchard
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.