The 1993 Tax Convention (‘the Old Convention’) between the Grand-Duchy of Luxembourg (‘Luxembourg’) and the Republic of Singapore (‘Singapore’), has been replaced by a new Tax Convention dated 9 October 2013 (‘the New Convention’), which entered into force on ... and will have effect from ...
The key points of the New Convention are summarized below:
The Protocol to the New Convention provides that a collective investment vehicle is a resident if it is liable to tax under its domestic laws by reason of its domicile, residence, place of management or any other criterion of a similar nature, even where an exemption applies subject to requirements specified in its domestic tax laws. This provision should be beneficial for the Luxembourg investment fund industry, in particular for SICAVs/SICAFs that should thus benefit from the reduced rates under the New Convention.
The New Convention has been modified in order to attribute an exclusive taxation right to the residence state of the recipient of dividends. The right to levy taxation at source is no longer provided (versus 5 or 10% withholding tax in the Old Convention).
Singapore does not levy withholding taxes on dividends under Singaporean domestic tax law; as such, the New Convention does not change the taxation applicable to dividend payments from a Singapore subsidiary to its Luxembourg shareholder. Luxembourg exempts such dividends either under the conditions of its domestic participation exemption or under the New Convention.
For a Luxembourg subsidiary paying dividends to its Singapore parent, the reduced rate under the New Convention is beneficial since withholding tax rates on dividends paid to its Singapore parent can always be reduced to 0%, even if the conditions for the Luxembourg participation exemption regime (as provided under Article 147 of Luxembourg Income Tax Law - “LITL”) are not met. The dividend received by its Singapore parent should typically be tax exempt under the qualifying conditions under its domestic tax laws
The New Convention provides for an exclusive taxation right in the residence state of the recipient of interest, that is, the right to levy withholding tax at 10% has been abolished.
The benefits of the New Convention for interest payments made by Luxembourg companies to Singapore creditors are limited since interest payments are generally not subject to withholding tax in Luxembourg.
The domestic withholding tax rate applied by Singapore on interest payment to non-residents is 15%. The reduced withholding tax rate of 0% applicable to payments made by Singapore debtors to Luxembourg creditors should positively impact the development of financing structures involving Luxembourg finance companies.
The New Convention provides for a withholding tax rate on royalties reduced from 10% to 7%.
For royalties paid by a Luxembourg entity to a Singaporean entity, the reduced withholding tax rate provided for in the New Convention has no impact since, based on the domestic tax law, there is no withholding tax on royalties.
Conversely, for Singaporean companies paying royalties to Luxembourg residents, the newly reduced rate is advantageous when compared to the domestic withholding tax rate of 10%. Further, Luxembourg exempts income from royalties as well as from the sale of intellectual property rights at 80%, which, together with the legal protection of the intellectual property under various international conventions available to Luxembourg companies, is an opportunity that might be considered.
Article 13 of the New Convention is broadly in line with the OECD Model Convention, whereby:
Consequently, gains realized by a Luxembourg shareholder from the disposal of shares in a Singapore subsidiary should be tax exempt in Singapore based on the New Convention, and tax exempt in Luxembourg under the participation exemption regime. As such, whether a divestment gain qualifies as capital or revenue in nature under Singapore law is irrelevant. Importantly, this also applies if the Singapore subsidiary is land rich.
Gains realized by a Singapore shareholder in a Luxembourg subsidiary should be tax exempt in Luxembourg according to the New Convention, and should also not be subject to tax in Singapore provided the gain is capital in nature. Where the gain is revenue in nature, it would be subject to tax if it is sourced in Singapore. However, gains derived from ordinary equity investments disposed of in a company during the period from 1 June 2012 to 31 May 2017 may not be taxed in Singapore provided certain conditions are met.
Limitation of relief
The New Convention abolished this clause. Also, it has been clarified that, unless they are not at arms’ length, interest, royalties and other disbursements should be tax deductible at the level of the payor.
Exchange of information
The provisions on exchange of information have been aligned to the 2005 OECD Model Convention.
Entry into force
The New Convention will enter into force on … and have effect from ….. One favorable provision of the Old Convention benefits from a grandfathering of 5 years: a deemed tax credit for withholding tax remains available in Luxembourg for withholding tax on dividends, interest and royalties which would have been payable if not for the tax exemption granted under the tax laws of Singapore. This is particularly relevant to interest and royalties derived by a Luxembourg resident company from Singapore, where Singapore has granted withholding tax exemption on such income which is made for the promotion of economic development in Singapore.
This New Convention is a significant step in further deepening business relationships between Singapore and Luxembourg, and the 5-year grandfathering clause for deemed tax credit allows companies sufficient time to adapt to the New Convention. Whilst Luxembourg is typically a hub for investors into Europe, Singapore is a typical hub for investors into Asia. Thus, aligning those two hubs should make cross border investments to corporates operating globally less burdensome.
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