Luxembourg: Update Of The OECD Model Tax Convention
On July 15th 2014, the OECD published its 2014 update of the Model Tax Convention (“2014 OECD Update”). This update is the outcome of the work accomplished between 2010 and the end of 2013. It does not however take into account the OECD conclusions of the “Action Plan on Base Erosion and Profit Shifting” (BEPS).
The 2014 OECD Update will be of interest to Luxembourg practitioners for various reasons. Aside from helpful clarifications in the field of taxation of Artists and Sportsmen (article 17) and some other questions of rather marginal interest regarding emissions permits/credits, the update is of major interest in relation to three recurrent problems in Luxembourg tax practice.
With respect to exchange of information, the update includes modifications to article 26 and its commentary which have been agreed by the OECD Council on July 17th 2012. The question on “foreseeable relevance”, which is key in order to allow exchange of information upon request in the banking sector, remains at the heart of the issue, together with the requirement to identify, to a certain extent, the relevant taxpayer. The 2014 OECD Update should however not substantially impact Luxembourg judicial practice in this field, which, like the 2014 OECD Update, tries to balance providing as much international assistance as possible with preventing fishing expeditions.
The details included in the 2014 OECD Update regarding the definition of “beneficial ownership” will be of major interest for practitioners. It is common knowledge nowadays that the sole payment of income from movable property (royalties, interest, dividends) to a Luxembourg resident recipient is not enough to allow for entitlement to the double tax treaty benefits (reduction or elimination) with regard to the withholding tax suffered in the source country.
One needs to make sure that the recipient of the income is also the “beneficial owner”. The 2014 OECD Update stresses that the concept of “beneficial ownership” needs its own, independent and autonomous definition instead of referring to the legislation of the source country. This is rather good news for Luxembourg companies, because the simple reference to national laws would have left Luxembourg without any means of recourse in case of future changes of legislation by our tax treaty partners. Another interesting and important change is the fact that the concept of “beneficial ownership” for international tax treaty purposes is not the same as the concept of “economic ownership” for anti-money laundering purposes. This small detail is of importance, because otherwise all Luxembourg entities not having a listed company as ultimate shareholder would have been exposed to a certain risk.
The treatment of indemnities paid upon the termination of an employment contract has also been modified in the sense that the indemnities are taxable in the country where the employment activity was carried out provided that the indemnities are economically linked to the employment, irrespective of whether they have been paid after termination of the employment contract (e.g. indemnities paid with respect to the period during which the employee is discharged from work).
The 2014 OECD Update, which was validated by the OECD Committee on Fiscal Affairs on June 26th will be included in a “revised version of the Model Tax Convention” to be published in the upcoming months.