On 22 June 2016, a bill of law (the Law) aiming to combat double non-taxation situations under the Luxembourg - US Treaty for the Avoidance of Double Taxation (the Treaty) was submitted to the Luxembourg Parliament. The Law accommodates the retroactive denial of Treaty benefits in respect of income attributable to a permanent establishment (PE) that is not subject to taxation due to differing domestic law interpretations of the notion of permanent establishment.
If the Law is adopted, the amendment of the Treaty will apply retroactively to amounts paid or credited as from the third day following the publication of the Law in the Luxembourg Official Gazette, subject to (i) a protocol to the Treaty (the Protocol) being agreed between Luxembourg and the US pursuant to which the Treaty will be amended in the manner set forth in the Law and (ii) the Protocol containing provisions regarding the entry into force thereof which are aligned with the aforementioned application to amounts paid or credited as from the third day following publication of the Law in Luxembourg.
Given the legislative schedule of the Luxembourg Parliament, it appears unlikely that the Law will be adopted prior to September.
The text of the Law is similar to the triangular case provision as included in the new US Model Income Tax Convention issued by the US Treasury Department in February 2016.
Pursuant to the Law, where an enterprise of one State derives income from the other State which would generally qualify for Treaty benefits, such benefits will be denied if (i) the residence State treats such income as attributable to a PE situated outside the residence State and (ii) the profits that are treated as attributable to such a PE are subject to a combined aggregate effective rate of tax in the residence State and the state where the PE is situated that is less than the lesser of (a) 15% or (b) 60% of the general statutory rate of company tax applicable in the residence State.
According to the explanatory memorandum to the Law, the specific aim is to end what is viewed as abusive situations whereby US source income derived by a Luxembourg company which is attributable to a PE situated in the US is untaxed both in Luxembourg and the US due to differing domestic law interpretations of the notion of a PE.
In addition, even in situations where the abovementioned 15% or 60% thresholds are met, Treaty benefits will be denied if the PE is situated in a third country which has not concluded a comprehensive treaty for the avoidance of double taxation with the source State from which Treaty benefits are claimed, unless the residence State includes the income as attributable to the PE in its tax base.
Finally, the Law provides that where a resident of one of the Treaty States is denied Treaty benefits due to the above, the competent authority of the other Treaty State may still grant the Treaty benefits with respect to a specific item of income if it deems such justified in light of the reasons why the requirements were not satisfied (e.g., in case of the existence of losses).