ATAD Luxembourg Implementation: Permanent establishment concept in a double tax treaty context

On 18 December 2018, the Luxembourg Parliament (Chambre des Députés) approved the draft law n°7318 (the "ATAD Draft Law"), which implements into domestic law the EU anti-avoidance directive of 12 July 2016 ("ATAD").

What has changed exactly?

§ 16 of the Steueranpassungsgesetz ("StAnpG") defines a permanent establishment under Luxembourg domestic law. Under the ATAD Draft Law, a new sub-paragraph has been added thereto, which strengthens the definition of the permanent establishment concept when the permanent establishment is established in a country with which Luxembourg has a double tax treaty ("DTT") in place. The aim is to have a consistent interpretation of the notion of permanent establishment, and as such, to tackle situation of discrepancy as regards the definition of permanent establishment between the country of the DTT and Luxembourg, leading in the past sometimes to double non-taxation situations.

What are the main takeaways?

First, a permanent establishment is to be construed solely on the basis of the criteria mentioned by the relevant DTT.

Second, based on the new sub-paragraph of § 16 StAnpG, a taxpayer will be deemed as having a permanent establishment in the country of the relevant DTT only if the activity of the permanent establishment, considered by itself, forms an independent activity and represents a participation in the general economic life in that other country, except if a provision of the DTT would challenge such an interpretation.

As highlighted by the State Council in its commentaries, it is important to keep in mind that situations are not intended to be tackled if the income of the permanent establishment is not taxed due to local provisions or lack of appropriate local provisions. Indeed, the aim is not to tax in all circumstances exempt income of capital of a permanent establishment, but to tackle situation of discrepancies of interpretation as regards to whether a permanent establishment exists or not.

According to the ATAD Draft Law commentaries it has been considered as not sufficient for the establishment of a permanent establishment, the mere management of financial assets or of intellectual property assets.

How is the burden of proof applied?

The taxpayer may be requested to provide a confirmation that the other country recognises the existence of a permanent establishment. In this respect, it has been specified that this proof can take any form, such as for instance a tax assessment or certificate issued by the foreign tax authorities, as long as it effectively recognises the existence of a permanent establishment in its territory.

This possibility for the Luxembourg tax authorities to request this confirmation results from the fact that it is easier for the country of source (i.e., the country where the permanent establishment is located) to consider and verify all facts and circumstances of a given scenario in order to assess whether a permanent establishment exists.

Important to keep in mind is that such confirmation must be provided in the situation where the relevant DTT does not contain a provision allowing Luxembourg to tax income or capital where the other country exempt such income or capital under the DTT (similar to the provision of art. 23A (4) OECD Model Tax Convention).

When will this rule be applicable?

The amendment of § 16 StAnpG will be applicable as of 1 January 2019.

What will be the impacts of this amendment for Luxembourg?

This amendment will in our view be of highest concern for any taxpayer having a permanent establishment in a DTT country, in particular where past discrepancies have already been noticed (e.g., USA). This is of course of particular relevance for DTTs that do currently not include a provision similar to the provision of art. 23A (4) OECD Model Tax Convention. As such, it is strongly recommended in those situations to analyse on a case-by-case basis in more detail the impacts of this amendment.

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