Luxembourg Tax News 2015-14

Luxembourg Tax News 2015-14

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New Protocol between the United Arab Emirates and Luxembourg

On 19 April 2015, the United Arab Emirates' ("UAE") cabinet approved a second protocol1 (the "Protocol") to the Income Tax Convention between Luxembourg and the United Arab Emirates dated 20 November 2005 (the "Convention")2. On the Luxembourg side, the Protocol was signed by the Council of Ministers on 2 April 2015 and has been submitted to Parliament for final approval.

Signed in Abu Dhabi on 26 October 2014, the Protocol not only tackles exchange of information related matters but also adds new favourable measures for bilateral investments.

The exchange of ratification instruments is yet to be done for the entry into force of the Protocol.

The Protocol shall become effective on 1 January of the calendar year following the year of its entry into force.

 

Key points

The new favourable provisions as detailed hereunder offer reciprocal investment opportunities. The key points of the Protocol relate to the following items of the Convention: capital gains, elimination of double taxation and international standard of exchange of information upon request.

Furthermore, the list of financial institutions as listed under the First Protocol is amended: whereas the list of Luxembourg financial institutions (for the application of Article 10 (dividends) paragraph 3 of the Convention) remains unchanged, the non-exhaustive detailed list of UAE financial institutions as defined under the Convention has been modified and now includes the following institutions:

  • Abu Dhabi Investment Authority
  • The Central Bank of the UAE
  • International Petroleum Investment Company
  • Abu Dhabi Investment Council
  • Mubadala
  • TAQA
  • Investment Corporation of Dubai

 

Capital gains

The first measure of the Protocol is to replace paragraph 4 of Article 13 of the Convention (capital gains) and add a paragraph 5 to that same article.

The new paragraph 4 covers the specific case of gains derived from the alienation of shares, bonds and other securities or similar instruments which are listed on a recognised stock market of a contractual State. The right to tax such gains shall only be granted to the other contractual State, i.e. the place of residence of the seller.

Under the new paragraph 5, it is specified that all other gains derived from the alienation of shares in a company, and not covered under paragraphs 1 to 4 of Article 13, such as bonds or similar securities, shall be taxable only in the State of residence of the seller.

 

Elimination of double taxation

Article 2 of the Protocol replaces the first paragraph of article 23 of the Convention (Elimination of double taxation), the new paragraph 1. foresees that:

  • Under sub-paragraph 1 a), where a Luxembourg resident receives income or owns capital subject to tax in the UAE, this income or capital is exempt from tax in Luxembourg (subject to sub-paragraphs b, c and d). However, these income/capital can be taken into account in order to compute the tax rate to be applied on the capital or income that still has to be taxed. Overall, paragraph 1 a) thus remains unchanged compared to the one initially included in the Convention (except for the added reference to the new sub-paragraph d).
  • Sub-paragraph 1 b) states that, where a Luxembourg resident receives elements of income which, in line with articles 7 (business profits), 10 (dividends), 13 (2) (capital gains on movable assets) and 16 (artists and sportsmen) are taxable in the UAE, Luxembourg will grant a deduction on the amount of (personal or corporate) income tax due for an amount equal to the taxes paid in the UAE (the deductible amount being capped at the amount of taxes, computed prior to the deduction and corresponding to these elements of income received from the UAE). This provision will not apply to business profits and capital gains on movable assets derived by a PE located in the UAE and with activities in the agriculture, industry, infrastructure or tourism sector. Indeed, following the new sub-paragraph 1 b), where income is derived from agriculture, industry, infrastructure or tourism via a permanent establishment (“PE”) in the UAE, such income will be exempt from tax in Luxembourg, whether or not tax has been paid in the UAE.
  • The new sub-paragraph 1 c) foresees that, where a Luxembourg resident company receives dividends form the UAE, such dividends shall be exempt from tax in Luxembourg provided the Luxembourg company has, since the beginning of its financial year, held at least 10% of the equity of the distributing UAE company, and provided the latter is subject to income tax at a rate comparable to that of the Luxembourg corporate income tax (in practice, that is considered met where an income tax rate of at least 10.5% is applied on a tax basis comparable to what would be taken into consideration in Luxembourg). Shares and participations in such UAE company shall, under the same conditions, be exempt from net wealth tax. The exemption foreseen by this sub-paragraph is applicable, even if the UAE company is fully or partially tax exempt, provided the dividends derive from benefits related to agriculture, industry, infrastructure or tourism activities in the UAE.
  • Finally, under sub-paragraph 1 d), it is specified that the provisions of sub-paragraph 1 a) shall not apply to income received (or wealth held) by a Luxembourg resident in the UAE, where the UAE apply the provisions of the Convention to exempt said income or wealth from tax or apply the provisions or article 10 paragraph 2) (withholding tax on dividends).

Following these new provisions, the tax treatment applicable to income related to agriculture, industry, infrastructure or tourism activities derived by a Luxembourg resident company from a UAE PE or subsidiary is much more favourable than what would be applicable under Luxembourg domestic law. The systematic full exemption of this type of income is an additional significant competitive advantage for Luxembourg.

 

Exchange of information

The original article 26 of the Convention is replaced by a new article 26 (and the First Protocol amended) so that the new measures apply the international standards with respect to exchange of information. In particular, the Protocol clarifies the notion of “foreseeable relevance” by providing details as to the specific requirements which would need to be indicated (and by whom) at the time an information request is done (e.g. identity of the person, tax purpose, etc.).

 

For further information, please do not hesitate to contact us.

 

1 The Protocol comes in addition to a first protocol dated 20 November 2005 (the "First Protocol").

2 The text is available in French under this link (PDF, 94 KB). 

  

 

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

 

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