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Double
Tax Treaties
Luxembourg
has signed Double Tax Treaties with more than 50 other countries,
following the OECD Model Tax Convention, although the treaty
with the US contains 'Savings' and 'Limitation of Benefits'
clauses which can negate the purpose of the treaty in some
circumstances.
Broadly
speaking the Tax Treaties provide that corporate entities
are charged to tax in the country in which they are resident
(the Treaties contain 'tie-breaker' clauses to resolve cases
in which both countries assert residence), except that if
an entity which is resident in one country has a permanent
establishment in the other country then the income from that
permanent representation is taxed in the second country. Individual
taxation likewise follows residence, but in the cases where
income could be taxed twice, there is either a 'tie-breaker'
clause or a provision offsetting tax paid in one country against
tax due in the other on the same income.
The
Tax Treaties normally provide that withholding tax on dividends
is at a lower rate than usual (15% rather than 25% for instance),
and that when there is a substantial participation (usually
25% or greater) an even lower or even zero rate is applied.
Likewise, reduced rates of withholding tax are applied to
interest and royalty payments (of course Luxembourg doesn't
apply withholding tax to interest in any case).
Tax
paid in one country is normally allowed as a credit against
tax due on the same income in the other country.
Income
from property is usually taxed in the country in which it
is situated.
In
November 2001 the US Internal Revenue Service confirmed that
the authorities of the United States and Luxembourg had entered
into a mutual agreement concerning the interpretation of the
transition rules of a new 'convention for the avoidance of
double taxation and the prevention of fiscal evasion with
respect to taxes on income and capital' that was signed in
Luxembourg in April 1996 and entered into force on December
2000.
The
agreement covers issues such as taxes withheld at source,
tax relief on income and property. The IRS states that it
has laid out the transition rules in order to resolve potential
ambiguities and to fulfill the need to provide certainty to
taxpayers.
It
adds: 'Taxpayers that did not exist prior to the date of entry
into force of the 1996 Treaty, and taxpayers that were in
existence but did not qualify for benefits under the 1962
Treaty, will not be entitled to claim the benefits of the
1962 Treaty.'
In
March, 2005, a double tax treaty was signed with Israel.
In
November, 2005, government officials from the United Arab
Emirates and Luxembourg put their signatures to a new double
taxation avoidance agreement intended to boost bilateral trade
and investment between the two states.
Welcoming
the agreement, Dr Mohamed Khalfan bin Khirbash observed that:
"This agreement will help provide equal taxation treatment
to investors in the UAE and Luxemburg. Moreover, it provides
an environment that stimulates foreign direct investment,
encourages business ventures, and enhances the cooperation
along with the economic growth levels within the two countries.
Further, it contributes new common projects that benefit the
national economic outcomes of the two countries."
"Moreover,
the agreement encourages tourism and bilateral trade between
the two countries especially after the implementation of income
and profit tax exemption regulations granted to national air
cargo companies. Emirates airlines, Al Ittihad, Air Arabia,
and any air transportation company will benefit from such
exemptions."
The
treaty was ratified in May 2009 and went into force on January
1, 2010.
NB:
This section gives some very brief and general details about
Double Tax Treaties; it is essential to refer to the individual
treaties as regards any particular case or situation. Note
also that Luxembourg 1929 Holding
Companies of all three types are not covered by Double
Tax Treaties.
In
November 2007, Hong Kong and Luxembourg signed a comprehensive
agreement on the avoidance of double taxation.
The
agreement aimed to help foster closer economic and trade links
between the two places, and provide added incentives for Luxembourg
enterprises to do business or invest in Hong Kong.
The
agreement was scheduled to come into force on April 1, 2008
in Hong Kong, and on January 1, 2008 in Luxembourg.
Then
in June 2008, it was announced that the governments of India
and Luxembourg had signed an agreement covering the avoidance
of double taxation and the prevention of fiscal evasion with
respect to taxes on income and on capital.
The
DTAA between India and Luxembourg was designed, in the case
of India, to cover income-tax and wealth tax including any
surcharge thereon. In the case of Luxembourg, it would cover
income tax on individuals, corporation tax, capital tax, and
the communal trade tax, it was announced at the time.
The
DTAA also addressed the tax treatment of dividend, interest,
royalties and fees for technical services-both in the country
of residence as well as the country of source.
On
April 28, 2009, Luc Frieden, Luxembourg's finance minister,
announced that Luxembourg had reached agreement on the details
of an accord with the USA to modify their 1996 Double Taxation
Treaty.
This
accord will allow for exchange of tax relevant information
between the tax authorities on demand for specific cases determined
in accordance with the agreement.
This
agreement was the first to be concluded since Luxembourg announced
it would implement OECD standards of information exchange
on March 13, 2009. As a financial hub for the region, it had
been under considerable pressure, especially from its neighbours
Germany and France, to conform to these standards.
In
May 2009, Luxembourg signed a convention for the avoidance
of double taxation and prevention of fiscal evasion with respect
to taxes on income with Bahrain. The treaty provides for the
exchange of information in tax matters in adherence to the
OECD standard.
On
May 22, 2009, the governments of Luxembourg and Liechtenstein
announced their intention to enter into negotiations to conclude
an OECD model convention on the avoidance of double taxation.
The agreement was signed later that year.
Luxembourg
concluded a new tax agreement with the Netherlands on May
29, 2009. The agreement will provide for the exchange of information
in tax matters between the two countries in accordance with
the OECD standard.
A
statement from Luxembourg’s Ministry of Finance said
that the protocol, which amends the existing double tax convention
of May 8, 1968, provides for the exchange of information on
request in individual cases between the tax administrations
of both countries. It applies to tax years 2010 and following
and has no retroactive effect. The agreement does not seek
an automatic exchange of bank information and does not allow
for general inquiries, or so called ‘fishing expeditions’.
Luxembourg
signed a new tax cooperation agreement with France in June,
2009, amending their 50 year old tax treaty to allow for exchange
of tax information.
French
Economy Minister Christine Lagarde told reporters after signing
the deal that: "I am unable to say how many hundreds
of thousands, perhaps millions, of euros we shall recover
as a result, but we shall recover all we can", she vowed.
Luxembourg
and Finland signed a protocol in July 2009 amending the treaty
of March 1, 1982 between Finland and the Grand Duchy for the
avoidance of double taxation and the prevention of tax evasion
regarding taxes on income and capital.
The
protocol provides for exchange of information upon request
between the tax administrations of both countries, and will
apply as of the tax year 2010. It is not intended as an automatic
exchange of banking information and does not allow for general
requests or so-called ’fishing expeditions’.
A
protocol amending the double taxation avoidance agreement
between the UK and Luxembourg to facilitate the exchange of
information for tax purposes between the two governments was
signed in London on July 2, 2009.
The
new Protocol updates the exchange of information article of
the existing double tax convention to bring it into line with
current OECD standards.
The
Protocol will enter into force once both countries have completed
their legislative procedures and will take effect for tax
years beginning on or after January 1 of the calendar year
following its entry into force.
Under
paragraph 1 of the Protocol, the competent authorities of
the Contracting States shall exchange such information as
is “foreseeably relevant for carrying out the provisions
of this Convention or to the administration or enforcement
of the domestic laws concerning taxes of every kind and description
imposed on behalf of the Contracting States or of their political
subdivisions or local authorities, insofar as the taxation
thereunder is not contrary to the Convention.”
Paragraph
2 stipulates that any information received under paragraph
1 by a Contracting State “shall be treated as secret
in the same manner as information obtained under the domestic
laws of that State and shall be disclosed only to persons
or authorities (including courts and administrative bodies)
concerned with the assessment or collection of, the enforcement
or prosecution in respect of, or the determination of appeals
in relation to the taxes referred to in paragraph 1, or the
oversight of the above.”
Paragraph
2 concludes: “Such persons or authorities shall use
the information only for such purposes. They may disclose
the information in public court proceedings or in judicial
decisions.”
Also
in July 2009, the State of Qatar and the Grand Duchy of Luxembourg
signed a double taxation agreement on the avoidance of double
taxation and the prevention of tax evasion regarding taxes
on income and capital.
Later
that month, Austria and Luxembourg signed an accord to amend
an existing double taxation treaty so that it provides for
the exchange of tax information.
On
July 27, 2009, the Principality of Monaco signed a convention
for the avoidance of double taxation and fiscal evasion with
Luxembourg.
The
agreement incorporates provisions for the exchange of tax
information between the two countries’ tax authorities
in accordance with the OECD standard. The agreement lays the
foundation for tax distribution rights on investment and trade
carried out by businesses and individuals in the respective
countries, and the parties hope that it will facilitate enhanced
cooperation in several areas including the fight against money
laundering, terrorist financing, and corruption.
During
a recent meeting held in Berlin in November 2009, German Finance
Minister Wolfgang Schäuble and his Luxembourg counterpart
Luc Frieden agreed to include the Organization for Economic
Cooperation and Development’s (OECD) standard on tax
information exchange in their bilateral double taxation agreement
(DTA).
In
accordance with the OECD standard, both countries agreed to
exchange information in tax matters upon request.
The
corresponding protocol to amend the DTA was signed in Luxembourg
in December 2009.
Also
in November 2009, Luxembourg’s Finance Minister Luc
Frieden and his Spanish counterpart Elena Salgado Mendez,
signed an amendment to the existing bilateral double taxation
agreement (DTA) in place between the two countries on the
sidelines of a European Council of Finance Ministers (Ecofin)
meeting.
In
accordance with the OECD standard, the revised DTA provides
for an exchange of information between the respective tax
authorities upon request in specific cases.
Following the signing of the agreement, Luxembourg will no
longer appear on the list of countries which, according to
a royal Spanish decree, define tax havens.
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Table
of Countries and Rates of Dividend Withholding Tax
| Country |
Max
Rate Per Treaty |
Rate
For 25% Holding |
| Austria |
15 |
5 |
| Belgium |
15 |
10 |
| Brazil |
15 |
15 |
| Bulgaria |
15 |
5 |
| Canada |
15 |
5 |
| China |
10 |
5 |
| Czechoslovakia
(a) |
15 |
5 |
| Denmark |
15 |
5 |
| Finland |
15 |
5 |
| France |
15 |
5 |
| Germany |
15 |
10 |
| Greece |
7.5 |
7.5 |
| Hungary |
15 |
5 |
| Indonesia |
15 |
10 |
| Ireland |
15 |
5 |
| Italy |
15 |
15 |
| Japan |
15 |
5 |
| Korea |
15 |
10 |
| Malta |
15 |
5 |
| Mauritius |
10
|
5
(b) |
| Morocco |
15 |
10 |
| Netherlands |
15 |
2.5 |
| Norway |
15 |
5 |
| Poland |
15 |
5 |
| Romania |
15 |
5 |
| Russian
Federation |
15 |
10
(c) |
| Singapore |
15 |
5 |
| Spain |
15 |
5 |
| Sweden |
15 |
5 |
| Switzerland |
15 |
5
(d) |
| United
Kingdom |
15 |
5 |
| United
States (1962) (e) |
7.5 |
5 |
| United
States (1996) (e) |
15 |
5 |
| Vietnam |
15 |
10
(f) |
NOTES:
(a)
The treaty which was agreed with Czechoslovakia continues
to apply in both the Czech Republic and Slovakia.
(b)
The lower rate of 5% applies when the recipient owns at least
10% of the paying company.
(c)
The 10% rate applies when the recipient holds at least 30%
of the paying company, or the value of its investment in the
paying company amounts to at least 75,000 euros.
(d)
A zero rate applies when the receiving company has owned at
least 25% of the paying company for 2 years or more.
(e)
The US 1962 double tax treaty was superseded by the 1996 treaty
at the end of the year 2000 (but see above).
(f)
A 5% rate applies when the receiving company holds at least
50% of the paying company or has invested at least $10 m in
the paying company.
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Other International Agreements
In
December, 2005, the government of Mauritius signed an agreement
on the Reciprocal Promotion and Protection of Investments
(IPPA) with the Belgium-Luxembourg Economic Union, which was
aimed at strengthening bilateral and economic ties between
the countries, and facilitating investment and mutual trade.
The
agreement was signed in Belgium by the Mauritian Minister
of Foreign Affairs, International Trade and Cooperation, Madun
Dulloo, the Minister of Foreign Affairs of the Kingdom of
Belgium, Karel De Gucht, and the Ambassador of the Grand Duchy
of Luxembourg in Belgium, Alphonse Berns.
Other
issues of cooperation were discussed, including development
aid to Mauritius through an economic resilience index, investment
in sectors like development of bio-fuels, and assistance in
the training and specialization of medical practitioners.
Following
the signature ceremony held at the Belgian Ministry of Foreign
Affairs, the head of the Mauritian delegation, Minister Dulloo
made a statement in which he emphasized the necessity for
such an agreement especially with the current reform of the
EU Sugar Regime and the serious difficulties facing the Mauritian
tourism and textile industry.
Mr.
Dulloo also pressed Belgium and Luxembourg to provide more
direct private investment from Luxembourg and Belgium and
presented the increased opportunities in ICT, fisheries and
financial services.
The
Belgian Foreign Affairs Minister, Mr. De Gucht, expressed
confidence that the Belgian authorities would consider including
the issues discussed in bilateral cooperation with Mauritius,
while Ambassador Berns highlighted the importance of the IPPA
for investors and the private sector.
In
January 2010, at a seminar, a delegation from the Dubai International
Finance Centre and Luxembourg for Finance, the agency responsible
for developing the financial sector in Luxembourg, signed
a Memorandum of Understanding (MoU) to promote cooperation
and industry development across a wide range of areas –
including market access, financial regulations and infrastructure,
training, and industry development for firms located in the
two jurisdictions.
Some
of the MoU’s key areas of focus include promoting the
exchange of information on banking, financial services and
securities legislation and regulation; sharing trends in financial
services and products; and promoting events taking place in
the two jurisdictions. Other areas include welcoming delegations
from each jurisdiction, cooperating in financial services
training and facilitating collaboration among universities
located in the two jurisdictions.
At
the seminar it was noted that the two financial centers are
complementary; the DIFC is a leading financial center and
a global gateway for capital and investment in a region stretching
between Europe and Asia, while Luxembourg is the second largest
investment fund center in the world and the Eurozone’s
premier hub for private banking.
Ahmed
Humaid Al Tayer, Governor of the DIFC, said: “By working
with other leading international financial centers such as
Luxembourg, the DIFC brings business opportunities and a continually
expanding scope of financial products and services not only
to DIFC-based firms, but also to the UAE and wider region.
Luxembourg is a natural partner for DIFC, with each center’s
strengths complementing those of the other, and opening many
possibilities for cooperation among our regulators, as well
as among the many firms located in our two jurisdictions.”
Fernand
Grulms, CEO of Luxembourg for Finance, added: “Between
Luxembourg and Dubai we see huge potential for bilateral business.
However, in the complex world of finance, this can only be
achieved by building partnerships among foreign financial
centers, so that’s why we are pleased to be here today
and to have signed this memorandum with DIFC. Luxembourg has
enormous expertise to offer clients in the region and opportunities
for collaboration with firms based in the MENA region.”
“International
investors, including sovereign wealth funds from the MENA
region, rely on Luxembourg’s expertise to structure
their worldwide investments, namely in the area of real estate
and private equity,” Grulms added. “For example,
local know-how in setting up, administering and distributing
investment funds has led the Bank of London and the Middle
East to launch a Shari’ah-compliant dollar income fund
from Luxembourg.”
Another
MoU, aimed at strengthening and developing economic, trade
and technical cooperation between the Kingdom of Bahrain and
the Grand Duchy of Luxembourg, was signed in January 2010
in Manama by Bahrain’s Minister of Finance, Shaikh Ahmed
bin Mohammed Al Khalifa, and Luc Frieden, the Luxembourg Minister
of Finance.
The
several areas envisaged for strengthened cooperation between
the two countries include financial and professional services,
investment, tourism, trade, industry, transport, telecommunications,
education, and scientific research.
The
MoU will encourage relevant businesses to explore the possibility
of joint projects in these areas, and establishes a joint
economic committee to coordinate its implementation.
Both
ministers praised the MoU and its crucial role in boosting
bilateral relations between Bahrain and Luxembourg. It adds
its weight to the agreement for the promotion and protection
of investments, previously signed by the two countries in
2006, and the convention for the avoidance of double taxation
and prevention of fiscal evasion with respect to taxes, signed
in 2009.
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LAWANDTAX-NEWS.COM
13/07 
