On Wednesday, Luxembourg's Minister of Finance Pierre Gramegna has submitted to Parliament a draft bill which aims to prevent certain tax planning practices which may have arisen in the past with regard to companies formed under Luxembourg law that receive income from US sources.
Luxembourg thus operates a targeted implementation of BEPS recommendations; BEPS stands for Base erosion and profit shifting, a technical term referring to the negative effect of multinational companies' tax avoidance strategies on national tax bases.
As part of its commitment to take into account international developments in taxation (BEPS), Luxembourg has indeed chosen to actively act against a possible situation of non-taxation that may result from the application of the bilateral tax treaty and from different interpretations of the concept of permanent establishment under domestic law of the United States of America and Luxembourg domestic law.
This draft bill will remedy for the future the pre-existing situation by allowing the United States as the State of source of the income to deny, in certain cases as specified in the draft bill, the benefits of the tax treaty, notably advantageous withholding tax rates, to income that is treated for the purposes of Luxembourg domestic law as attributable to the permanent establishment of another State.
