Most DTTs provide for a mutual agreement procedure (“MAP”) aiming to eliminate juridical and economic double taxation situations arising from their application. The MAP provisions are in principle drafted in accordance with article 25 of the OECD Model Tax Convention. In the case of “covered tax agreements”, certain provisions of the Multilateral Convention (“MLI”) may also apply.
On 11 March 2021, the Luxembourg tax authorities published Circular LG Conv. D.I. n°60 (“the Circular”) which replaces the former Circular LG Conv. D.I. n°60 dated 28 August 2017. This new Circular updates the guidance and provides useful information on the MAP, from its initiation to its conclusion.
Scope
The MAP request shall concern a case where decisions of Luxembourg and another Contracting State lead (or may lead) to a situation that is not in accordance with the provisions of the DTT.
The Circular emphasizes that the scope of the MAP is very broad and that it covers most situations which include for instance multilateral disputes (provided a DTT has been concluded between Luxembourg and each State concerned) or transfer pricing adjustments (including those made further to an initiative of the taxpayer itself).
The Circular also indicates that the MAP should only be denied in specific circumstances (which include taxpayer’s foreclosure). In this respect, the Circular clearly states that access to the MAP cannot be denied either on the sole ground that the MAP request was initiated following the application of domestic or treaty anti-abuse provisions, or that, further to a tax audit, adjustments made by the tax authorities were accepted by the taxpayer.
Initiation of the MAP and main conditions
The Luxembourg competent authority is the Ministry of Finance. In practice, the request is to be sent to the relevant tax authorities’ Directorate, depending on the matter of the MAP.
To initiate a MAP, several conditions must be met, notably (and subject to specific DTT provisions):
- The MAP must be initiated by a person (including a company) that is a tax resident of Luxembourg (not always required – depending on the DTT provision) and the taxation of which is subject to a dispute.
- The MAP must be initiated, in principle, within 3 years following the reception of the first notification of the decision that triggered the dispute (for instance: notification of a tax assessment or tax audit of a taxpayer where it is likely that it will result in a taxation not in accordance with the DTT).
Based on the Circular, the starting point of the deadline is to be interpreted in the way least restrictive for the taxpayer. The Circular also mentions that the taxpayer who wishes to wait for the result of a procedure initiated based on domestic law provisions can file a “protective” MAP to make sure that the deadline is met.
Progress of the MAP
Further to the filing of the MAP, the Luxembourg tax authorities will review the request and, if incomplete, may invite the taxpayer to provide additional information. They must also inform the authorities of the other Contracting State within 2 months.
Provided the MAP initiated is admissible, the Luxembourg tax authorities will first determine whether a unilateral settlement of the dispute is possible. It may be typically the case when the dispute originates from a decision taken by the Luxembourg tax authorities.
When not possible, the international phase starts and the Luxembourg tax authorities then communicate with the competent authority of the other Contracting State in order to resolve the case mutually.
Outcome of the MAP
In case the result of the MAP provides for a modification of the Luxembourg taxation, any adjustment (decided unilaterally or not) is subject to the taxpayer’s approval. In this respect, downward adjustments are possible, irrespective of the procedural delays provided for by Luxembourg internal law, whereas upward adjustments are only possible within these delays.
The Circular indicates that interest and penalties, while in principle not considered as taxes under a DTT and therefore not falling into the scope of the MAP, are in principle cancelled or adjusted accordingly in Luxembourg when they relate directly to the taxation impacted by the MAP.
In any event, the taxpayer is informed in writing of the outcome of the MAP by the Luxembourg tax authorities.
Although both states endeavor to find a satisfying solution, they are not bound by an obligation of result. In this scope, one of the possible outcomes of the MAP is an absence of agreement between the Contracting States, in which case the double taxation remains.
In the event that no consensus is reached, depending on the provisions of the DTT, the taxpayer may request that the Luxembourg tax authorities and the authorities of the other Contracting State submit the unresolved dispute to a binding arbitration procedure. This clause is notably provided by the Multilateral Convention, and therefore included in several DTT to which Luxembourg is party.
Articulation between the MAP and other procedures
First of all, the Circular clearly indicates that the MAP cannot be denied to a taxpayer that has been subject to a tax audit.
Moreover, being a non-judicial procedure, the MAP can be initiated irrespective of any other procedure provided by the internal law of the Contracting states. In this case, both procedures can be conducted separately.
In case a solution is proposed under the MAP, it can however only be implemented provided the taxpayer renounces to all other ongoing appeals.
In case a final decision under an appeal is rendered before the outcome of the MAP is known, then the Luxembourg tax authorities can pursue the MAP, but that decision needs to be taken into consideration and the outcome of the MAP cannot then aggravate the taxpayer’s situation.
The MAP is not incompatible with the European Arbitration Convention which can be pursued concomitantly with the MAP. In practice, when both requests are admissible, the instruction and discussion are carried out globally with the other Contracting State.
However, the initiation of a mutual agreement procedure under the law of 20 December 2019 implementing Directive (EU) 2017/1852 on tax dispute resolution mechanisms (to which the Circular does not apply) terminates any other ongoing agreement procedure, including a MAP, provided it relates to the same matter.
If you wish to discuss these topics, please contact: Tiberghien, Luxembourg
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