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Impact of MLI’s principal purpose test on Luxembourg's private equity sector examined


Companies, including those in the private equity sector, should consider the relevance of the PPT to their business operating models in the post-BEPS environment.

Luxembourg was one of the signatories to the OECD Multilateral Instrument (MLI) on June 7 2017 and opted to apply the principal purpose test (PPT) to all its tax treaties. 

Once the MLI is in effect, tax benefits (e.g. a tax reduction, exemption, deferral, refund or relief from double taxation) under covered treaties should not be available where one of the principal purposes of certain transactions or arrangements is to secure a treaty benefit and obtaining that benefit in these circumstances would be contrary to the object and purpose of the relevant treaty provisions.

An OECD discussion draft issued on January 6 2017 provides examples of how local tax authorities could assess situations to determine whether treaty benefits should be granted or denied. Adapting a company's business operating model to resemble situations in which treaty benefits would be granted could help to facilitate obtaining benefits.

The 'regional investment platform' example is the most relevant for the private equity sector. RCo, a tax resident of State R, is a wholly owned subsidiary of an investment fund established in and regulated by State T (the Fund). RCo operates exclusively to generate an investment return as a regional investment platform, through the acquisition and management of a diversified portfolio of private market investments located in countries in a regional grouping that includes State R and State S. The decision to establish the regional investment platform in State R was driven by several factors, for example, the availability of directors with knowledge of regional business regulations, the existence of a skilled workforce, State R's membership in a regional grouping and State R's extensive treaty network (including a treaty with State S that provides for low withholding tax rates). RCo employs an experienced local management team to review investment recommendations and performs various other functions. RCo's board of directors, appointed by the Fund, is composed of a majority of State R resident directors experienced in investment management, plus members of the Fund's global management team.

The OECD explains in the discussion draft that, since one of the objectives of a tax treaty is to encourage cross-border investments, it is necessary to consider the context in which the investment was made. Given the facts, the OECD concludes that it would not be reasonable to deny the benefits of the State R-State S treaty to RCo in the absence of other facts or circumstances showing that RCo's investment is part of an arrangement or relates to another transaction undertaken for the principal purpose of obtaining treaty benefits.

This example would support the granting of treaty benefits to an investment scheme where a regional investment platform as a subsidiary of a fund, special purpose vehicles (SPVs) holding the investments and a service company in which the substance is pooled and core commercial activities are conducted and sub-delegated to the SPVs are located in a single jurisdiction.






Dany Teillant ( and Audrey Legrand (

Deloitte Luxembourg


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