Luxembourg ratifies 20 OECD compliant exchange of information protocols and treaties and defines the new rules of the game

On March 17^th, 2010, the Luxembourg Parliament approved 12 exchange of information protocols as well as 8 double tax treaties that have recently been signed. At the same time, the procedure applicable to exchange of information upon request was adopted.

Background

In order to comply with the demands of the G20, Luxembourg has renegotiated some of its Double Tax Treaties (“DTTs”). This followed the announcement made by the Luxembourg Government on March 13^th 2009 regarding its commitment to comply with OECD standards on international tax cooperation. As a result, Luxembourg was removed from the so-called OECD "grey list" of the OECD Report on the jurisdictions surveyed by the OECD Global Forum on the implementation of the internationally agreed tax standards.

Luxembourg DTTs, which are OECD compliant as of today

As of today, DTTs in line with the current version of article 26 of the OECD Model Tax Convention are as follows:

	Countries	Date of signature	First tax year subject to exchange of information
1	Armenia	23.06.09	2011 at the earliest
2	Austria	07.07.09	2011 at the earliest
3	Bahrain	06.05.09	2011 at the earliest
4	Belgium	16.07.09	2011 at the earliest
5	Denmark	04.06.09	2011 at the earliest
6	Finland	01.07.09	2011 at the earliest
7	France	03.06.09	2010
8	Germany	11.12.09	2010
9	Iceland	28.08.09	2011 at the earliest
10	India (1)	02.06.08	2010
11	Liechtenstein	26.08.09	2011 at the earliest
12	Mexico	07.10.09	2011 at the earliest
13	Monaco	27.07.09	2011 at the earliest
14	Netherlands	29.05.09	2011 at the earliest
15	Norway	07.07.09	2011 at the earliest
16	Qatar	03.07.09	2011 at the earliest
17	Spain	10.11.09	2011 at the earliest
18	Switzerland	25.08.09	2011 at the earliest
19	Turkey	30.09.09	2011 at the earliest
20	UK	02.07.09	2011 at the earliest
21	USA	20.05.09	2009

(1) since the protocol to the Indian DTT states that if Luxembourg signs a DTT or protocol with an EU member state, which offers an arrangement for more favourable or effective exchange of information, then the same arrangement shall also apply for the purpose of exchange of information to the Indian-Luxembourg DTT.

Exchange of information under the amended DTTs

• Scope

The rules as regards exchange of information upon request only apply to the 21 above-mentioned DTTs. These rules do neither apply to other DTTs nor to a pure domestic context.

The 21 new treaty provisions only relate to exchange of information upon request. The Luxembourg tax authorities may now provide information upon request which may be considered to be foreseeably relevant to the correct application of the relevant DTT or the tax law of the 21 countries that have signed the said DTTs. As a result, no so-called fishing expeditions may be undertaken as the given treaty partner must demonstrate to what extent the information sought may be foreseeably relevant. The commentaries to the draft law refer to the examples of the commentary to the OECD Model Tax Convention in order to define what may be understood as being foreseeably relevant.

• Competent authorities

Depending on the nature of the exchange of information request and the nature of the tax concerned, either the direct tax authorities (Administration des Contributions Directes), the indirect tax authorities (Administration de l’Enregistrement et des Domaines) or the customs and excise authorities (Administration des Douanes et Accises) will be competent to handle the information request and may require the foreseeably relevant information from the information holder. In cases where it can’t be decided who should be in charge (for example because of a conflict), the direct tax authorities will be deemed to be competent.

• Information request - procedure

The new provisions allow the Luxembourg tax authorities to request foreseeably relevant information from Luxembourg information holders and obliges the information holder to provide the information within a certain delay.

Prior to requesting information from the holder, the Luxembourg tax authorities have to make sure that the requested information does fall within the scope of an authorized exchange of information upon request, i.e.:

• The information relates to the correct application of the 21 DTTs or to the administration and enforcement of the domestic tax laws of these 21 contracting states;
• The request of the foreign authorities evidences that they have pursued all domestic means to access the requested information except those that would give rise to disproportionate difficulties;
• The information is to be considered as foreseeably relevant. 

While the holder of the information is not defined in this new law, the commentaries to the draft law included in the report of the budget and finance commission dated March 9^th, 2010, assert that the information holder is to be understood in the broadest sense and includes in particular professionals of the financial and insurance sectors. In this manner, the new provisions introduce a legal exception to the professional secrecy as defined by article 41 of the amended financial sector law of April 5^th 1993 and by article 111-1 of the amended insurance sector law of December 6^th, 1991.

The same commentaries specifically exclude certain professional relationships from the scope of the present law. Indeed, the commentaries refer in this respect to the 2002 commentaries to the OECD Model Tax Convention according to which “The provisions (…) shall not impose (…) the obligation to obtain or provide information, which would reveal confidential information between a client and an attorney, solicitor or other admitted legal representative where such communications are produced for the purposes of seeking or providing legal advice or produced for the purposes of use in existing or contemplated procedures”.

The commentaries go on to provide the example of a lawyer who also acts as domiciliary agent or as company director. In his capacity of a domiciliary agent or company director, the lawyer would be required to provide information requested by the tax authorities. Any information obtained in his capacity of legal adviser could be withheld. 

The information has to be provided by the information holder within a delay of one month following the notification by the tax authorities of their request for information. In case the information is not provided on time, a fine of up to EUR 250.000 can be applied. 

• Information request – appeal against the information request and the fine

An appeal can be made against the information request or against the fine within a delay of one month. Once the administrative tribunal has rendered its decision, an appeal is possible before the administrative court within a delay of 15 days following the notification of the decision.

Next steps

The Luxembourg ratification process of the 20 DTTs and protocols will be finalized as soon as the law is published in the Official Gazette (Memorial). Some of the DTTs and protocols still need, however, to be ratified by the other contracting states. Assuming that the ratification by all contracting states will occur prior to year end, the new rules of exchange of information will apply:

• in most cases to tax years starting on or after January 1^st, 2011.
• as far as France, Germany and India are concerned, to tax years starting on or after January 1^st, 2010.
• finally, regarding the US, to tax years starting on or after January 1^st, 2009. 

As indicated previously, the new rules only apply to the 20 protocols and treaties referred above as well as to the treaty with India. This implies that they do not apply to treaties or protocols to be concluded in future by Luxembourg. For these, Luxembourg will have to either introduce a specific law or extend the scope of the present law. 

Conclusion

All in all, the procedure is far from being clear and Luxembourg professionals and clients will be required to live through a period of uncertainty before all open issues have been solved in practice.

Nevertheless, Luxembourg has taken a decisive step towards adopting the minimum OECD standards in regards of cooperation between foreign tax authorities. Whether this will be enough for its EU and G20 partners remains to be seen. 

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