INSIGHT: Double Taxation Dispute Resolution Mechanisms in Luxembourg

Over the past few years, new tax regulations have increased significantly and have created legal uncertainty for the taxpayer. International tax issues have never been so numerous and growing international tax pressure increases the risk that two jurisdictions will seek to tax the same transactions or activities, thus resulting in a potential double taxation. While double tax treaties (DTTs) should resolve most double taxation issues directly, international double taxation may persist in cases where two jurisdictions disagree on the interpretation or application of a treaty provision.

For many years, Article 25 of the OECD Model Tax Convention has provided for a mutual agreement procedure (MAP), independent from the ordinary legal remedies available under domestic law, through which the competent authorities of the contracting states may resolve differences or difficulties regarding the interpretation or application of the relevant DTT on a mutually agreed basis. In practice, the success of this procedure has been limited.

As a result, and in the framework of Actions 14 and 15 of the BEPS Project Reports, a mandatory binding MAP arbitration (MBMA) provision has been developed within the multilateral instrument (the MLI) to strengthen the effectiveness and efficiency of the MAP process in resolving treaty-related disputes.

For this purpose, the MLI sets up minimum standards agreed on by over 90 countries, including Luxembourg, which signed the MLI on June 7, 2017, and modifies the covered DTT (28 jurisdictions have already opted to introduce an arbitration procedure to their tax treaties). On August 28, 2017, the Luxembourg tax authorities also released a circular (the Circular) on the procedures implementing the double taxation dispute resolution mechanisms provided for by DTT concluded by Luxembourg.

Simultaneously, a directive on tax dispute resolution mechanisms in the EU was adopted on October 10, 2017 (the MAP Directive) to resolve double taxation issues in the context of the proper functioning of the internal market. The Luxembourg government submitted a draft law on double taxation dispute resolution mechanisms to the Luxembourg Parliament on April 11, 2019 (the Draft Law) in order to implement the MAP Directive by the end of 2019.