In the past, where a Luxembourg company distributed a dividend to a German pool of assets (“Sondervermögen”), it was unclear whether it should apply a withholding tax of 0%, 5% or 15%: different tax offices applied diverging views.
On 9 February 2015, the Luxembourg Tax Authorities issued a circular which sheds light upon the uncertainties surrounding the rate of withholding tax to be applied in this context.
The key question: Who is entitled?
The key question was: Who was actually entitled to benefit from the new non-double tax treaty between Luxembourg and Germany (“the Treaty”)? Three scenarios could be envisaged:
Relevant provisions and debate resulting therefrom
For the followers of Alternative 2 and 3 the key debate stemmed from different interpretations of article 10 of the Treaty and its protocol.
Article 10 of the Treaty states that the withholding tax rate shall not exceed 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership or an investment company) which holds directly at least 10% of the capital of the company paying the dividends.
Paragraph 1 of the Treaty protocol states that an investment fund which is constituted under the law of a Contracting State [A] and which derives dividends in the other Contracting State [B] may submit a claim for the limitation of taxing right provided for in Article 10 and 11, to the extent the units of the investment fund are held by residents of the first-mentioned State [A]. The admission of any claim of the investment fund extinguishes the right of the unit holders to make a claim for the same benefit1.
Thus, the question was: To benefit from the 5% withholding tax, is it sufficient that the Sondervermögen itself holds 10% in the Luxembourg distributing company (Alternative 2) or is it necessary that the investor holds (indirectly via the Sondervermögen) 10% (Alternative 3)?
Where the Sondervermögen has multiple investors, one may end up with a case where the Sondervermögen has a stake of 10% in the Luxembourg company whilst the investors have a stake less than 10%.
A Sondervermögen holds 10% in a Luxembourg company. It has 10 investors.
None of the investors would have an indirect 10% stake in the Luxembourg company. However, the Sondervermögen has a 10% stake in the Luxembourg entity. Also, the Management Company might be legally considered as having a stake of 10% in the Luxembourg company.
Clarification by the Tax Authorities
The Tax Authorities clarified that a distinction needs to be made between
From a procedural point of view, it is the Sondervermögen which can claim the reduced withholding tax pursuant article 10 and 11 of the Treaty on behalf of its beneficiaries. If so, the beneficiaries are no longer entitled to ask for reimbursement from a procedural point of view.
From a substantial point of view, the Tax Authorities deny first that the Sondervermögen is entitled to benefit from the Treaty rates. That is, even if the Sondervermögen holds 10% in the Luxembourg company, this does not necessarily mean that it is entitled to a reduced dividend withholding tax. Rather the reduced rates can be claimed in proportion to its investors being German tax residents. The Tax Authorities provide the following example:
Where the beneficial recipient, i.e. the investor in the German Sondervermögen, is a company (other than a German partnership or a German “Investmentaktiengesellschaft”), which holds at least 10% in the capital of the Luxembourg company paying dividends, the 5% rate under the Treaty applies, unless the even more favorable article 147 LITL kicks in. In all other cases, 15% withholding tax is due.
Last but not least, the Tax Authorities apply the above principles mutatis mutandis on dividend and interest payments made by German companies to Luxembourg Fonds commun de placement (“FCP”).
Conclusion and comments from the industry
The Tax Authorities have refused to apply Alternative 1 or Alternative 2. Rather they make reference to the investors in the Sondervermögen to determine whether a reduced withholding tax rate applies (Alternative 3) and consider the Sondervermögen as fiscally transparent.
For interest payments by Luxembourg companies the matter might be less prominent as typically no withholding tax applies based on domestic law.
It remains to be seen whether the German Tax Authorities share the view on payments made by German companies to Luxembourg FCPs.
Initial comments from the fund industry welcome the elimination of uncertainty in regard to dividend distributions from Luxembourg companies to German Sondervermögen. In other words, the situation is finally clear.
However, there is a downside. For instance retail funds’ return on investment will be reduced considerably by the 15% dividend withholding tax applicable. Thus, although retail investors can typically credit the withholding tax back in Germany against their income tax liability, the performance of the fund may look less favourable. As such, future distributions should be carefully monitored and discussed in advance with a tax advisor.
For further information, please do not hesitate to contact us.
“Zu dem Abkommen insgesamt
1. Ein nach dem Recht eines Vertragsstaates gebildetes Investmentvermögen, das aus dem anderen Vertragsstaat stammende Dividenden oder Zinsen bezieht, kann die in den Artikeln 10 und 11 dieses Abkommens vorgesehenen Beschränkungen des Besteuerungsrechts des anderen Vertragsstaats geltend machen, soweit die Anteile an dem Investmentvermögen von in dem erstgenannten Staat ansässigen Personen gehalten werden. Mit Anerkennung eines Anspruchs des Investmentvermögens erlischt das Recht der Anteilscheininhaber an diesem Investmentvermögen, einen Anspruch auf dieselbe Vergünstigung geltend zu machen.Im Sinne dieser Bestimmung bedeutet Investmentvermögen a) in der Bundesrepublik Deutschland ein durch eine Kapitalanlagegesellschaft verwaltetes Sondervermögen im Sinne des Investmentgesetzes,b) in Luxemburg ein Investmentfond (fonds commun de placement).
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