International Tax and Vat Developments Luxembourg 2014

Get up to speed with recent international
tax and VAT developments affecting

Luxembourg
19 June 2014
Agenda
Introduction
Guy Harles, Co-Chairman, Arendt & Medernach
BEPS: OECDs latest developments

Thierry Lesage, Partner, Arendt & Medernach
International initiatives in the field of automatic exchange of information

Recent developments, outlook and data protection
Rdiger Jung, Member of the Executive Committee, ABBL
Alain Goebel, Partner, Arendt & Medernach
EU: New challenges in the field of VAT (especially for real estate
investment funds)
Bruno Gasparotto, Principal, Arendt & Medernach
2
Get up to speed with recent tax and VAT developments affecting Luxembourg
19 June 2014
Luxembourg
Copyright 2014 Arendt & Medernach SA
BEPS: OECDs latest developments
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19 June 2014
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I. Background
Global issue:
increased segregation between the location where actual business activities and
investments take place and the location where profits are reported for tax purposes
Base erosion and profit shifting: allocation of income and expenses between related
corporations or branches of the same legal entity in order to reduce the overall tax liability of the
group or corporation
Lack of harmonisation between the national tax systems
Double deduction (DD) and Deduction / non inclusion (D/NI) arrangements

Tax competition Treaty shopping
Tax challenges of digital economy
What is at stake?
States side
Need of tax ressources
Fair allocation of taxing rights
Integrity of tax system
MNEs side
Decreasing global effective tax rate
CSR: managing reputational risk
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I. Background
G20 input
June 2012 Mexico G20 Summit

Governments declared the necessity to fight against BEPS
February 2013 Publication of the BEPS report announcing the Action Plan
July 2013 Mexico G20 meeting Presentation of the Action Plan
Since April 2014 Publication of Public Discussion Drafts
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I.
Background / OECD
OECD Action Plan

Issue
Action
Outcomes
Agenda
1. Digital economy
Identify main issues

and solutions
Report
Sept. 2014
2. Hybrid mismatch
arrangements
Neutralise the effects
(i)
Sept. 2014
(ii)
Modification of the OECD

Model Tax Treaty
Recommendations
regarding the design of
domestic rules
3. CFCs
Strengthen domestic
rules
Recommendations regarding
the design of domestic rules
Sept. 2015
4. Interest deductions
Limit base erosion
(i)
Sept. 2015
Dec. 2015
(ii)
Recommendations
domestic rules
Changes
to
transfer
pricing principles
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I. Background
OECD Action Plan
Issue
Action
Outcomes
Agenda
5. Harmful tax practices
Counter harmful tax

practices
more
effectively, taking into
account:
- Transparency
- Substance
(i)
Finalize the review of

member countries regimes
(ii) Expanding participation to
non-OECD members
(iii) Revision of existing criteria
(i)
Sept. 2014
(ii)
Sept. 2015
(iii)
Dec. 2015
Prevent
(i)
Changes to OECD Model

Tax Treaty
Recommendations
domestic rules to identify
harmful tax practices
Sept. 2014
6. Prevent treaty abuse
(ii)
7. Permanent
establishment
Prevent
artificial
avoidance of PE status
Changes to OECD Model Tax

Treaty
Sept. 2015
8-10. Transfer pricing
Assure that transfer

pricing outcomes are in
line with value creation
Changes to transfer pricing

guidelines and possibly to OECD
Model Tax Treaty
Sept. 2014
Sept. 2015
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I. Background
OECD Action Plan
Issue
Action
Outcomes
Agenda
11-13. Transparency
(i)
(i)
(i) & (ii)

Sept. 2015
Elaborate
methods
to
collect and analyze data
on BEPS and actions to
address it
(ii) Require
taxpayers
to
disclose their aggressive
planning arrangements
(iii) Re-examine transfer
pricing documentation
Recommendations
regarding data to be
collected
and
methodologies to analyze
them
(ii) Recommendations
domestic rules
(iii) Changes
to
transfer
pricing guidelines
(iii)
Sept. 2014
14. Dispute resolution
Make
dispute
resolution
mechanisms more effective
Change to OECD Model Tax

Treaty
Sept. 2015
15. Multilateral
instrument
Elaborate
(i)
(i) Sept. 2014
(ii)
Report
identifying
relevant
public
international law and tax
issues
Elaborate a multilateral
instrument
(ii) Dec. 2015
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I. Background
HYBRID MISMATCH ARRANGEMENTS
Focus on DD & D/NI arrangements
Hybrid financial instruments

Hybrid entity payments
Reverse hybrids and imported mismatches
Recommendation
Development of model treaty provisions and recommendations regarding the design of domestic rules to neutralise
the effect of hybrid instruments and entities ( Public Discussion Draft ACTION 2) including domestic law
provisions
Ensuring that hybrid instruments and entities are not used to obtain the benefits of treaties unduly
Preventing exemption or non recognition for payments that are deductible by the payor
Denying a deduction for a payment that is not includible in income by the recipient or similar
Denying a deduction for a payment that is also deductible in another jurisdiction
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Summary of recommendations for domestic laws
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I. Background
TREATY ABUSES
Existing domestic and international tax rules should be modified in order to more closely align the
allocation of income with the economic activity generating that income (Public Discussion Draft
ACTION 6)
Recommendations
Inclusion in tax treaties of a specific anti-abuse rule based on a limitation-on-benefits

provision (LOB clause) (like in treaties concluded by the US)
Inclusion of a general anti-abuse rule, the so-called main purpose test
Inclusion of a Preamble to the treaty stating clearly that
The prevention of tax evasion and avoidance is a purpose of tax treaties

No room for double non-taxation or reduced taxation schemes
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II. Hybrid mismatch arrangements

Hybrid mismatch arrangements
Impacts on Luxembourg structures
CPECs / PECs are treated as debt by Luxembourg

and as equity by the Funds jurisdiction
Consequences of such mismatch:

Deductible interest on an accrual basis for the CPECs
issuer
Taxation on a cash basis for the CPECs holder
Fund
Equity
return
Interest
CPECS
/ PECS
LuxCo
D/NI mismatch arrangement?
The recommendation is not intended to impact

on questions of timing in the recognition of
payments (88 Draft Discussion Paper)
No threat on CPEC planning
Risks under BEPS

- Payer jurisdiction denies interest deductions
- Payee jurisdiction recognizes interest payments
as income
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The loan is ignored under the current

legislation of the Funds jurisdiction as LuxCo
1 is a transparent entity for the Funds
jurisdiction purposes
Interest accruals give rise to a deduction in

Luxembourg at LuxCo 1s level
D/NI mismatch arrangement
Fund
Interest
Loan
LuxCo 1
Risks under BEPS
LuxCo 2
- Payer jurisdiction (Lux) denies deductions

- Income inclusion by Investor jurisdiction
(Funds jurisdiction)
Solutions ?
Make LuxCo 1 opaque for the Funds jurisdiction tax purposes ?

Financing of LuxCo 1 via CPECs instead of a loan ?
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Lux
LuxCo
LLC/LP is treated as a Foreign PE under the

treaty
No actual taxation of the PE in the Foreign

jurisdiction (no foreign trade or business under
foreign domestic law)
No taxation of PEs income in Luxembourg

(treaty exemptions)
Double non-taxation
Foreign
jurisdiction
Risk under BEPS
LLC/LP
- Deny of PE status by Luxembourg
Loan
Solutions ?
Debt for equity SWAP convert common stock into CPECs

Collapse LLC/LP into LuxCo
Replace LLC/LP by a low-taxed PE in a treaty jurisdiction (e.g. HK)
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III. Prevent treaty abuse

Fund
Optimization of the withholding tax route
Withholding tax exemption by virtue of the

Treaty between ForeignCo and LuxCo
Actual withholding tax between ForeignCo

and the Funds jurisdiction (which is located
in another jurisdiction)
Dividends
LuxCo
Dividends
ForeignCo
Risk under BEPS

- Application of Foreign / Luxembourg treaty
denied
Solutions?
Increasing economic substance at LuxCos level to satisfy the main purpose test
Transfer of risks and functions to LuxCo
Presence of Luxembourg AIF / AIFMD gives a non-tax motive
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International initiatives in the field of

automatic exchange of information
Recent developments, outlook and data protection
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Summary
1. International initiatives
1.1. Foreign Account Tax Compliance Act (FATCA)
1.2. EU Savings Directive 2003/48/EC (EUSD)
1.3. Council Directive 2011/16/EU on Administrative Cooperation
1.4. Multilateral Convention on Mutual Administrative Assistance
2. Outlook
3. The issue of data protection

3.1. Consent
2.2. Information protected
2.3. Access to the information
2.4. Conclusion on data protection
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Mechanism
Foreign financial institutions (FFIs) must report to US tax authorities (IRS) information about financial
accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership
interest
An FFI is a non-US entity that accepts deposits in the ordinary course of banking or similar business, is engaged in the business
of holding assets on account for others or is primarily engaged in the business of investing, reinvesting, or trading in securities
In case of non-compliance of the FFI with FATCA reporting obligation 30% withholding tax applies on all its US source
investment income as of the year 2014
The implementation of FATCA relies on intergovernmental agreements (IGA) to be signed between the US
and foreign countries 2 Models of IGAs have been released by the IRS
Under Model 1 IGA, adopted by Luxembourg, the FFIs must report tax information to the relevant domestic authority (e.g.
Luxembourg tax authorities), which will then automatically transmit the information to the IRS FFIs established in jurisdictions
that entered into Model 1 IGA will not need to enter into an FFI agreement with the IRS to be FATCA compliant (but registration
with the IRS still required)
Under Model 2 IGA (Japan, Switzerland, Denmark) the FFI has to enter into an FFI agreement and must report directly to the
IRS
On 13 February 2014
On 13 February 2014 the OECD issued its Common Reporting Standard (CRS)
Main target: creating a global standard in financial and tax relevant exchange of information
Setting up a similar regime to US FATCA
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1.2. EU Savings Directive 2003/48/EC
Current regime
Principle : each EU Member State must require paying agents established within its territory to provide
automatically to its tax authorities details of the payment of cross-border interest made to any individual or
residual entity resident or established in another EU Member State (and dependent territories)
Exception: during a transitional period, Luxembourg is allowed not to apply the automatic exchange of
information method but instead levy a WHT (35%), unless the beneficiary of the interest payment has
expressly opted for the exchange of information method
Scope: only applicable to interest income - income from life insurance contracts and structured products
does not fall within the EUSD scope
Bill n6668 : replaces the withholding tax system with the automatic exchange of
information system as from 1 January 2015
EU level - New Savings Directive adopted to be implemented by 2017
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Sources and Scope
Article 8 of the Directive 2011/16/EU provides for a mandatory automatic EOI between Member States which
will enter into force on 1 January 2015
Limited to 5 categories of income and capital and based on available information regarding taxable
periods as from 1 January 2014
income from employment;
directors fees;
pensions;
life insurance products not covered by other Directives; and
ownership and income from immovable property
The information must be available
Applies to taxes of all kinds with the exception of VAT, customs duties, excise duties and compulsory
social contributions already covered by separate legislation
Based on OECD standards limited to foreseeable relevance of the information
The Directive contains a most favored nation clause question on relationship may arise at FATCAs
implementation
New draft of an extended directive
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Source
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters developed jointly
by the Council of Europe and the OECD in 1988 and amended by Protocol in 2010, both signed by
Luxembourg on 29 May 2013 Article 6 foresees the possibility of an automatic EOI between the
contracting States
Scope
Automatic EOI applies to categories of cases determined by each contracting State in separate mutual
agreements concluded with one or several contracting State(s) automatic EOI not mandatory
Applies to taxes of all kinds (including VAT, excise duties and compulsory social contributions) with the
exception of customs duties
Based on OECD standards limited to foreseeably relevant information
Ratified by Luxembourg on 26 May 2014 (bill n6643)
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2. Outlook
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2. Outlook
IGA (model 1) signed
Draft law under elaboration
Consultation of Luxembourg Data Protection Authority still missing
Ratification by Luxembourg
Administrative agreement, based on art. 26 of the Model DTT in US

http://ssrn.com/abstract=2280508
IRS and Treasury recently announced a transition period (Notice 2014-33), the Federal
Government intends to delay imposing heavy penalties on banks for now (as long as foreign
authorities believe that banks are acting in good faith ).
Mainly targeted to entities (some are difficult to classify W8 BEN/E = 8 pages)
UK and GE announced to NOT apply transition period: why ? ( one might be tempted to think
about reciprocity)
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2. Outlook
Scheduled to enter into force 1 January 2017

Identification of the effective beneficial owner of interest payment, different definition
for inside/outside EU
Entities / legal arrangements outside EU (listed in Annex I of Savings 2.0): look-through approach
Entities / legal arrangements within the EU : obligation to act as paying agent upon receipt of
interest payment from any upstream economic operator as long as the beneficial owner is an individual
resident in another EU Member State
Non-exhaustive list of entities in Annex III of the Savings 2.0

Exceptions: assets relating to life insurance contracts, pension funds, certain investment funds and
entities or arrangements set up for charitable purposes
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2. Outlook
Enlargement of the scope of the EUSD to income equivalent to interest payments
Life insurance contracts whose performance is linked to >40% debt income interest/debt income or
equivalent income (covered by the EUSD) and providing for a biometric coverage of less than 5 % of the
capital insured
Structured products income paid or credited to an account, relating to securities of any kind under
which the investor receives:
a return on capital whose conditions are determined at the issuing date;

at the end of the term, at least 95% of the capital invested; regardless whether the underlying assets include debt
claims
Enlargement of the scope of the EUSD to non-UCITS investment funds (irrespective of

legal form)
Interest income obtained from all non-UCITS by individual resident in the EU would be subject to
effective taxation or EOI
Luxembourg SIF or non-UCITS incorporated as SICAV/SICAF should fall within the scope of the EUSD
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2. Outlook
Draft extended directive (2013): inclusion of all investment income (in addition to the 5
categories of income, out of which member states must choose 3 and exchange info as of
01/01/2016, based on data gathered in 2015)
Last version: only available data to be exchanged ; term now simply dropped
Apparently: New (second) draft under elaboration by EU Commission, inclusion of

OECD CRS (Common Reporting Standard)
European Banking Federation asks for :
One single (IT-) standard
Big bang approach (not multiple bilateral agreements)
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2. Outlook
Two most interesting articles: art 6 and 27
Multilateral convention is on EoI on demand, but art 6 = possible extension to automatic

exchange
With respect to categories of cases and in accordance with procedures which they
[countries] shall determine by mutual agreement, two or more parties shall automatically
exchange the information referred to in article 4 .
Which form of agreement ? (to be ratified by Parliament or administrative agreement

?)
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2. Outlook
Two most interesting articles: art. 6 and art. 27 (part II)

Art 27:
(1) The possibilities of assistance provided by this Convention do not limit, nor are
they limited by, those contained in existing or future international agreements or
other arrangements between the Parties concerned or other instruments which relate
to co-operation in tax matters.
(2) Notwithstanding paragraph 1, those Parties which are Member States of the
European Union can apply, in their mutual relations, the possibilities of assistance
provided for by the Convention in so far as they allow a wider co-operation than the
possibilities offered by the applicable European Union rules.
Art 27 (2) does not help, if violation of EU Charter of Fundamental

Rights (because EU law is higher ranking than bi-/multilateral agreements
between MS; constant ECJ jurisprudence since van Gend & Loos, 1964 !!)
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3.1. Consent
3.2. Information protected
3.3. Access to information
3.4. Conclusion on data protection
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3.1. Consent
EU data protection directive requires a lot of rules to be respected before database

may be created; amongst them justification of necessity of data base (??; see
existing instruments), as well as consent of data subject (may be overridden in
certain cases)
Strict rules applicable to any treatment of data = 3 (at the level of the bank, the
sending and the receiving tax administration)
Already necessity questionable, because of:
volume of information treated

no indicia of fraud
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3.1. Consent
Recent ECJ case Digital Rights

(on the Data Retention Directive)
http://curia.europa.eu/juris/liste.jsf?num=C-293/12
N 58: Directive affects, in a comprehensive manner, all persons using electronic

communications services, but without the persons whose data are retained being,
even indirectly, in a situation which is liable to give rise to criminal prosecutions.
It therefore applies even to persons for whom there is no evidence capable of
suggesting that their conduct might have a link, even an indirect or remote one,
with serious crime
N 62: Above all, the access by the competent national authorities to the data retained
is not made dependent on a prior review carried out by a court or by an
independent administrative body .
Data Retention Directive (2006) completely annulled by Court in 2014
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3.2. Information of the customer
Does customer need to be informed about transfer of data ?
Recent ECJ Sabou case:http://curia.europa.eu/juris/document/document.jsf?num=C276/12
My opinion: yes (but different situations in MS)
Data protection directive is one of the legal acts of the EU, which is most disregarded
and mistreated by EU politicians
Nobody seems to care about, but the directive has its foundations in the European
Charter of Fundamental Rights, which (entered into force with the Lisbon Treaty in
2009)
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3.3. Access to the information
May be excluded under strict conditions !
But need to be justified, like data collection !
Justification and limits must be in the law ! (Art 52 of EU Charter of Fundamental Rights,
see: Digital Rights case, n 38)
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3.4. Conclusion
Disregarding the EU Charter of Fundamental Rights and the Data Protection

Directive is a HUGE political error !
Who will come up for the very important damage claims, when AEOI is annulled 8
years after implementation (by banks) ?
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Conclusion
Multiple initiatives
Several texts
Legal uncertainty
Increased costs
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EU: New challenges in the field of VAT
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EU: New challenges in the field of VAT

Why VAT is challenging for real estate structures ?
Different place of supply rules
Not property related services:
B2B: taxation in the country of the recipient (Art 44)

B2C: taxation in the country of the service provider (Art 45)
Property related services: taxation in the country of the property (Art 47)
Different exemption rules

Regulated funds (FCP, SIF, etc.): VAT exemption available as well as for fund
management services
Unregulated funds: full taxation
Different VAT rights and obligations
Invoicing and VAT liabilities

VAT registration (multiple)
VAT returns / European Sales Listings (ESLs)
VAT deduction
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Service
VAT
exempt/taxation
(where ?)
VAT
exempt/taxation
(where ?)
HoldCo
Recharge+VAT?
VAT
recovery ?
Investment
Advisor
VAT
exempt/taxation
(where ?)
Asset
Manager
VAT
exempt/taxation
(where ?)
Fund/PropCo
Recharge+VAT?
15% VAT
cost
15% VAT
cost
Legal /
Set up costs
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CJEU case regarding the place of supply

C-155/12 RR Donnelley dated 27 June 2013
Art 44 vs. Art 47
taxation in the country of the recipient vs. taxation in the country of the property
Only supplies of services which have a sufficiently direct connection with immovable property come
under Art 47 of the VAT Directive.
As far as the concept of immovable property is concerned, one of the essential characteristics of
such property is that it is attached to a specific part of the territory of the Member State in which it is
located.
In order for a service to come within the scope of Art 47, that supply must be connected to
expressly specific immovable property.
However, in so far as a large number of services are connected in one way or another with
immovable property, it is, in addition, necessary that the services should relate to the immovable
property itself. That is the case, inter alia, where expressly specific immovable property must be
considered to be a constituent element of a service, in that it constitutes a central and essential
element thereof.
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CJEU case regarding the place of supply (RR Donnelley case continued)
The services listed in Art 47, which concern the use or the development of immovable
property, or the management, including the operation and evaluation, of such property, are
characterized by the fact that the immovable property itself constitutes the subject matter
of the service.
A storage service, which cannot be regarded as relating to the development, management

or evaluation of immovable property, is capable of coming within the scope of Art 47 only
on the condition that the recipient of that service is given a right to use all or part of
expressly specific immovable property.
The supply of a complex storage service, comprising admission of goods to a warehouse,

placing them on the appropriate storage shelves, storing them, packaging them, issuing
them, unloading and loading them, comes within the scope of that article only if the
storage constitutes the principal service of a single transaction and only if the recipients of
that service are given a right to use all or part of expressly specific immovable property.
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Sources for interpreting the place of supply rules

VAT Committee guidelines (not binding)
Working document 688
Circular 745bis of the AED

No reverse charge
Mandatory VAT registration
No definition
EU Regulation 1042/2013 dated 7 October 2013

Effective as from 1 January 2017
Explanatory notes from the EU Commission

Announcement dated 1 April 2014 with the set up of working groups
Guidance for businesses and Member States regarding services connected with
immovable property
Finalisation planned for mid-2015
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New CJEU referral regarding the VAT exemption:

C-595/13 Staatssecretaris van Financin and Fiscale Eenheid X NV cs dated
21 November 2013
2 questions:
Is a company which has been set up by more than one investor for the sole purpose
of investing the assets assembled in immovable property may be regarded as a
special investment fund for the fund management VAT exemption ?
In Luxembourg, VAT exemption regime also applies to real estate funds !
If yes: does the term management also cover the actual management of the
companys immovable property, which the company has entrusted to a third party?
In principle, daily management of the property is not VAT exempt (taxation in the country of
the property)
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Conclusions
Conflicting VAT principles
No EU harmonisation of the notion of property related services
Risk of double taxation (with no EU arbitrage)
Optimization and management of VAT aspects is of a ever growing
importance
Distinct VAT monitoring for the structuring phase and the operational phase
VAT compliance
New possible developments with the VAT exemption
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Contact us
Thierry Lesage, Partner
Tel: (352) 40 78 78 328
Email: thierry.lesage@arendt.com
Alain Goebel, Partner

Tel: (352) 40 78 78 512
Email: alain.goebel@arendt.com
Bruno Gasparotto, Principal

Tel: (352) 40 78 78 909
Email: bruno.gasparotto@arendt.com
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International Tax and Vat Developments Luxembourg 2014

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Get up to speed with recent international

tax and VAT developments affecting

BEPS: OECDs latest developments

International initiatives in the field of automatic exchange of information

Copyright 2014 Arendt & Medernach SA

BEPS: OECDs latest developments

Copyright 2014 Arendt & Medernach SA

Lack of harmonisation between the national tax systems

Double deduction (DD) and Deduction / non inclusion (D/NI) arrangements

Copyright 2014 Arendt & Medernach SA

June 2012 Mexico G20 Summit

July 2013 Mexico G20 meeting Presentation of the Action Plan

Since April 2014 Publication of Public Discussion Drafts

Copyright 2014 Arendt & Medernach SA

OECD Action Plan

Identify main issues

Neutralise the effects

Modification of the OECD

Limit base erosion

Copyright 2014 Arendt & Medernach SA

5. Harmful tax practices

Counter harmful tax

Finalize the review of

Changes to OECD Model

6. Prevent treaty abuse

Changes to OECD Model Tax

8-10. Transfer pricing

Assure that transfer

Changes to transfer pricing

Copyright 2014 Arendt & Medernach SA

(i) & (ii)

14. Dispute resolution

Change to OECD Model Tax

(i) Sept. 2014

(ii) Dec. 2015

Copyright 2014 Arendt & Medernach SA

Focus on DD & D/NI arrangements

Hybrid financial instruments

Denying a deduction for a payment that is also deductible in another jurisdiction

Copyright 2014 Arendt & Medernach SA

Summary of recommendations for domestic laws

Copyright 2014 Arendt & Medernach SA

Inclusion in tax treaties of a specific anti-abuse rule based on a limitation-on-benefits

Inclusion of a general anti-abuse rule, the so-called main purpose test

Inclusion of a Preamble to the treaty stating clearly that

The prevention of tax evasion and avoidance is a purpose of tax treaties

Copyright 2014 Arendt & Medernach SA

II. Hybrid mismatch arrangements

CPECs / PECs are treated as debt by Luxembourg

Consequences of such mismatch:

D/NI mismatch arrangement?

The recommendation is not intended to impact

No threat on CPEC planning

Risks under BEPS

Copyright 2014 Arendt & Medernach SA

II. Hybrid mismatch arrangements

The loan is ignored under the current

Interest accruals give rise to a deduction in

D/NI mismatch arrangement

- Payer jurisdiction (Lux) denies deductions

Make LuxCo 1 opaque for the Funds jurisdiction tax purposes ?

Copyright 2014 Arendt & Medernach SA

II. Hybrid mismatch arrangements

LLC/LP is treated as a Foreign PE under the