Accessing Luxembourg's Tax Treaty Network: Challenges and Implementation of BEPS Measures

1. Jacques Wantz, Senior Associate 4 April 2017 BEPS and the MLI: Gettingaccess to Luxembourg’staxtreaty network goingforward

2. Getting tax treaty access – status quo Luxembourg residencecertificate • 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

3. The Luxembourg-Russia tax treaty

4. OECD BEPS project – Overview

5. 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

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

7. 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

8. 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

9. 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

10. OECD examples: Regional investment platform (1/2) Scenario • HoldCo acts as regional investment platform for Fund • Acquires and manages portfolio of private market investments Investors Dividend WHT 10% Regulated Fund Drivers for HoldCo in State R State T (anywhere) 100% • 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 HoldCo Dividend WHT 30% no treaty 5% with treaty State R (Luxembourg) State S (EU country) Sub 1 Sub 2 Sub 3

11. 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 Investors Dividend WHT 10% Regulated Fund State T (anywhere) 100% HoldCo Tax benefit sought Dividend WHT 30% no treaty 5% with treaty Reduced WHT on dividends under State S/State R tax treaty State R (Luxembourg) State S (EU country) Result: Not reasonable to deny treaty access Sub 1 Sub 2 Sub 3

12. 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 Trustee 1 share 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

13. 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 Trustee 1 share Securitisation Company Tax benefit sought Reduced WHT on interest under State S/State R tax treaty 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

14. 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

15. OECD examples: Immovable property fund (2/2) Activities and functions of HoldCo Regulated manager Institutional Investors • 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 Tax transparent LP State C (anywhere) HoldCo Tax benefit sought Loan Loan Loan State R (Luxembourg) • Access to tax treaties between State R and S States State S (EU country) HoldCo tax position not better than investor tax position for direct investment ! PropCo 1 PropCo 2 PropCo 3 Loans Bank Result: Not reasonable to deny treaty access

16. Contacts Jacques Wantz Senior Associate Luxembourg Tel: +352 44 44 5 5101 Mob: +352 621 330 668 jacques.wantz@allenovery.com

17. Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings. LU:11472719.5