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Double
Tax Treaties
Luxembourg
has signed Double Tax Treaties with 39 other countries, all
of which follow 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.
See
the table in the following section as regards the countries
covered by Double Tax Treaties and the applicable rates of
withholding tax.
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 have 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."
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.
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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 is
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.
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