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.
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:
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:
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.).
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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).
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