Financial sector professionals learned long ago that Luxembourg's key geographic position offers a great place for growth. Life insurance and private banking industries have drawn on the Grand Duchy's local expertise and multilingual capabilities in selling their products and services across the EU. In other words, operating in foreign markets via persons, called agents, intermediaries or commissionaires, has become the norm.

Until now, it has generally been supposed that, in the light of the existing tax treaties, such agents, intermediaries, and commissionaires do not constitute permanent establishments (PEs) of Luxembourg entities in the eyes of the relevant foreign countries.

A different look

A material change in this analysis might, however, result from the recommendations of the OECD's project against base erosion and profit shifting (BEPS), especially from BEPS Action 7. BEPS Action 7's purpose is to prevent artificial avoidance of PE status, and the recommendation has been drafted in a way that allows foreign countries to increase their rights to recognise a local PE.

A number of life insurance companies and private banks operate internationally and take advantage of the freedom to provide services (which, for many, is at the core of the European Common Market). The implementation of BEPS Action 7 would allow Luxembourg's neighbouring countries to tax the profits attributable to the potentially newly recognised PEs situated in their respective jurisdictions, creating an administrative burden and maybe warranting additional prudential supervision.

Multilateral instrument: Luxembourg and beyond

BEPS implementation is particularly complex due to the size of the project, so the OECD has developed the so-called "multilateral instrument" (MLI), which is designed to allow interested countries to swiftly amend their tax treaty network. Only certain BEPS actions are covered by the MLI—Action 7 among them.

The MLI was signed on 7 June 2017, Minister of Finance Pierre Gramegna signing on Luxembourg's behalf. This instrument enables Luxembourg to simultaneously update its 81 tax treaties currently in force (subject to consent from the relevant treaty partners) in order to ensure that they comply with certain BEPS recommendations without the need for separate bilateral negotiations.

Signing countries were allowed to make reservations or take certain options. More precisely, where a substantive provision did not reflect a minimum standard (e.g. Action 7), the signing country was generally given the flexibility to opt out of that provision partly or entirely.

With respect to Action 7, Luxembourg has decided not to further expand the definition of "permanent establishment" to include situations in which the dependent agent "habitually plays the principal role leading to the conclusion of contracts that are routinely concluded with material modification by the enterprise."

Other countries, like the Netherlands and France, have decided differently. The tax treaties that Luxembourg has with such countries will, however, not be affected as long as Luxembourg does not change its position.

Luxembourg private bankers and insurance companies should therefore not be hit by this new rule in the first place. However, pressure from foreign tax authorities will undoubtedly continue to increase and we cannot exclude the possibility that, in some cases, foreign tax authorities will take unilateral measures that go beyond the rules applicable according to the relevant tax treaty. Taxpayers with a "commissionaire distributor model" will have therefore to remain vigilant and continue to closely monitor all developments and initiatives on this front.

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