On 11 March 2021, the Luxembourg Tax Authorities published a Circular[1] providing guidance on the process for initiating the mutual agreement procedure (“MAP”) under bilateral income tax treaties and explaining the interaction with other procedures and legal remedies.
Under Article 25 of the Organization for Economic Co-operation and Development (OECD) Model Tax Convention, which is included in most of the double taxation treaties signed by Luxembourg, the MAP aims to provide a mechanism to resolve cross-border tax disputes arising from the interpretation or application of a double tax treaty provision by means of a non-judicial procedure.
The main points covered by the Circular are summarized below.
SCOPE
The Circular reaffirms the content of Article 25 of the OECD Model Tax Convention under which the MAP applies to the following situations:
- When taxpayers disagree with tax authorities on their tax situation as they consider that the measures taken by one or both contracting parties to the double tax treaty result or will result in taxation not in accordance with the provisions of the double tax treaty;
- When the interpretation or application of a double tax treaty raises doubts or difficulties; or
- When the competent authorities wish to consult each other for the purpose of eliminating double taxation in cases not provided for in a double tax treaty.
PROCEDURE
Initiation of the Procedure
To initiate MAP, a written request has to be sent to the competent authorities in Luxembourg, meaning the Minister of Finance or his authorized representative in Luxembourg. The Circular lists the information and documents to provide with the request, notably among them a description of relevant facts and questions to the case and the reference to the controverted tax treaty provisions. The competent authorities in Luxembourg may ask for other documents for the procedure as well.
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 subject him to taxes not in accordance with the provisions of the double tax treaty, unless the statute of limitation is different in the texts provided by the tax authorities in order to determine the exact deadline applicable in each case.
Conduct of the Procedure
At first, the Luxembourg competent authorities will assess if the taxpayer’s request is admissible. Then, it will assess if it can unilaterally resolve the issue. It will be the case if the action leading to taxation that is non-compliant with a double tax treaty has been taken by the Luxembourg tax authorities. Then the Luxembourg competent authorities will request that tax authorities proceed with the required corrective.
If the Luxembourg competent authorities cannot resolve the issue unilaterally, they must contact the competent authorities of the other state to resolve the issue. Their role is to try to find a satisfactory solution.
Then, the competent authorities will inform the taxpayer of the outcome of the procedure in writing.
End of the Procedure
If an agreement is reached between the competent authorities of the countries involved 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.
MAP does not provide binding arbitration and the competent authorities have the possibility to terminate the MAP without reaching an agreement, in which case the double taxation is not eliminated.
Interaction with Domestic Procedures
MAP is a non-judicial procedure and is independent from domestic procedures. Thus, the taxpayer could potentially initiate a MAP and a domestic procedure at the same time.
If the competent authorities reach an agreement before a decision has been reached by the Luxembourg courts, the execution of this agreement will be subject to the condition that the taxpayer waives his right to appeal. On the other hand, if a final domestic judicial decision is delivered before an agreement has been reached by the competent authorities in the MAP, the Luxembourg competent authorities can still continue the MAP but must consider the outcome of the domestic decision in their resolution of the case.
Yann Ricard was a contributing author to this insight.