Getting access to Luxembourg’s tax treaty network going forward BEPS and the MLI: Getting access to Luxembourg’s tax treaty network going forward Jacques Wantz, Senior Associate 4 April 2017

Getting tax treaty access – status quo Luxembourg residence certificate Typically required to get treaty access Well established practice by Luxembourg tax authorities Challenges Domestic anti-abuse provisions In Luxembourg (abuse of law) In other contracting State (beneficial ownership provisions, anti-tax avoidance measures Restrictive treaty provisions Impact of OECD BEPS project

The Luxembourg-Russia tax treaty Article 4, residence Tie-breaker clause foresees mutual agreement procedure - place of effective management located where: board meetings are usually held, senior day-to-day management is carried on, and managers usually exercise their functions Article 10, dividends Reduced withholding tax rates on dividends only available if recipient is beneficial owner thereof. Article 29, limitation of benefits No treaty benefits if main purpose (or one of main purposes) for creation or existence of beneficiary was to obtain treaty benefits.

OECD BEPS project – Overview 1 15 actions covering virtually all traditional international tax issues 2 Final BEPS Reports released in October 2015 3 Implementation of action points by National laws: Measures may potentially be implemented/interpreted differently in various jurisdictions Changes to tax treaties by way of multilateral instrument (action point 15) 4 Already measures labelled as BEPS measures by many countries (e.g. French interest deduction ceiling rules) 5 EU level: Parent-Subsidiary Directive, Anti-tax avoidance directive

MLI – Implementation of tax treaty related BEPS measures Multilateral convention entered into by all jurisdictions implementing BEPS Covers all tax treaty related measures in BEPS package (hybrid mismatches, treaty abuse, artificial avoidance of PE, improving dispute resolution) MLI provisions to be applied alongside existing tax treaties (“in place of” or “in absence of” or “modifying” existing provisions) Possibility to opt out from provisions (reservations) Covered Tax Agreements: Contracting jurisdictions list treaties to which MLI applies Large discretion left to bilateral relations

Illustration of the MLI mechanism RU-LUX MLI Russia’s MLI Luxembourg’s MLI Russia – Luxembourg DTT Russia Luxembourg

Implementation of BEPS Action 6 (treaty abuse) Change to preamble: tax treaties may not be used to achieve double non-taxation In addition, choice to adopt either of: PPT only; PPT + simplified/detailed LOB; or detailed LOB + other anti-conduit measures MLI does not include detailed LOB PPT: A treaty benefit must be denied where: one of the principal purposes of an arrangement is to secure a benefit under a treaty; and granting such benefit would be contrary to the object and purpose of the relevant provisions of the treaty

BEPS Action 6 – Treaty abuse The CIV/non-CIV distinction in OECD materials CIVs Widely held, diversified portfolio, regulated (UCITS) Conclusion in 2010 Report on treaty access by CIVs Less concerns about treaty abuse by CIVs (individual tax planning not possible, as widely held) NON-CIVs Alternative investment funds (AIF), including private equity funds Concerns from governments that non-CIV funds are used to provide treaty benefits to investors which they could not have obtained themselves defer recognition at investor level of income on which treaty benefits have been granted

BEPS Action 6 – Treaty abuse Progress on the non-CIV discussion 24 March 2016 Consultation paper on treaty access for non-CIVs published - work in progress 2015 Final Report on Action 6 on non-CIVs: « OECD recognises the economic importance of these funds and the need to ensure that treaty benefits be granted where appropriate » 6 January 2017 Discussion draft with examples

OECD examples: Regional investment platform (1/2) Scenario HoldCo acts as regional investment platform for Fund Acquires and manages portfolio of private market investments Regulated Fund HoldCo Investors Sub 1 Sub 3 Sub 2 State S (EU country) State R (Luxembourg) State T (anywhere) 100% Dividend WHT 10% Dividend WHT 30% no treaty 5% with treaty Drivers for HoldCo in State R Managers with knowledge of regional business practices and regulations Skilled multilingual workforce State is member of regional grouping with common currency (EU) Extensive tax treaty network

OECD examples: Regional investment platform (2/2) Activities and functions of HoldCo Management team: majority of residents/expertise in investment management Reviews Fund’s investment recommendations Approves and monitors investments Carries on treasury functions Maintains books and records Ensures compliance with target state regulations Regulated Fund HoldCo Investors Sub 1 Sub 3 Sub 2 State S (EU country) State R (Luxembourg) State T (anywhere) 100% Dividend WHT 10% Dividend WHT 30% no treaty 5% with treaty Tax benefit sought Reduced WHT on dividends under State S/State R tax treaty Result: Not reasonable to deny treaty access

OECD examples: Securitisation company (1/2) Scenario Bank sets up SeCo and transfers portfolio of loan receivables SeCo fully debt financed Notes listed and held through a clearing system Widely held by third party investors Bank retains small portion of notes to comply with regulatory requirements Investors Bank State T (anywhere) Notes Risk retention 1 share Trustee Securitisation Company Drivers for SeCo in State R Robust securitisation framework and legislation Skilled and experienced personnel and support services Extensive tax treaty network Loan receivables State R (Luxembourg) State S (EU countries) WHT 30% no treaty 10% with treaty Interest SMEs

Securitisation company (2/2) Specific circumstances Investors’ decision to invest not driven by specific underlying investment SeCo’s investment strategy not driven by investor tax position Investors Bank State T (anywhere) Notes Risk retention Tax benefit sought Reduced WHT on interest under State S/State R tax treaty 1 share Trustee Securitisation Company Same benefit available under State S/State T tax treaty ! Loan receivables State R (Luxembourg) State S (EU countries) WHT 30% no treaty 10% with treaty Interest Result: Not reasonable to deny treaty access SMEs

OECD examples: Immovable property fund (1/2) Scenario Regulated manager Institutional Investors Tax transparent RE Fund with regulated manager Holds portfolio of RE assets in specific region (EU) All investments made via HoldCo, which provides debt and equity financing to PropCos Tax transparent LP State C (anywhere) Drivers for HoldCo in State R HoldCo Political stability Regulatory and legal systems Lender and investor familiarity Qualified personnel Extensive treaty network Loan Loan Loan State R (Luxembourg) State S (EU country) PropCo 1 PropCo 2 PropCo 3 Loans Bank

OECD examples: Immovable property fund (2/2) Activities and functions of HoldCo Protects Fund from liability Facilitates internal/external debt financing Facilitates making, managing and disposal of investments Administers claims for WHT relief for all applicable tax treaties Regulated manager Institutional Investors Tax transparent LP State C (anywhere) Tax benefit sought Access to tax treaties between State R and S States HoldCo Loan Loan Loan State R (Luxembourg) State S (EU country) HoldCo tax position not better than investor tax position for direct investment ! PropCo 1 PropCo 2 PropCo 3 Loans Result: Not reasonable to deny treaty access Bank

Contacts Jacques Wantz Senior Associate Luxembourg Mob: +352 621 330 668 jacques.wantz@allenovery.com

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