Luxembourg Tax News 2015-19 | KPMG | LU

Luxembourg Tax News 2015-19

Luxembourg Tax News 2015-19

1000

Contact

Partner

KPMG in Luxembourg

Contact

Related content

Tax Treaty Update

Over the last years, Luxembourg has been very active in negotiating bilateral tax treaties with several countries. There are currently 76 tax treaties in force entered into by Luxembourg and 29 treaties under negotiation. Tax treaties can be the legal framework not only for the avoidance of double taxation and fiscal evasion, but also for international administrative cooperation between Luxembourg and its treaty partners in terms of mutual assistance and procedures, as well as in terms of exchange of information.

On 9 June 2015, the Luxembourg Minister of Finance submitted to the Parliament a bill of law on the ratification of four new double tax treaties concluded with Singapore, Andorra, Croatia and Estonia, and on six protocols amending existing tax treaties concluded with Mauritius, Ireland,  Lithuania, Tunisia, France and the United Arab Emirates. In general, these tax treaties and protocols follow the OECD Model Convention.

Except for the protocol amending the tax treaty with France, the protocols were concluded in order to bring the articles on exchange of information in line with OECD standards. The protocol to the France-Luxembourg tax treaty changes the rules applicable to the taxation of capital gains realized upon the sale of shares or other rights in real estate companies and allocates the right to tax these gains to the country where the real estate is located (“situs principle”). For more information on this subject reference is made to our KPMG Newsletter of 9 September 2014 (Luxembourg Tax News 2014-17).

 

The new double tax treaties

Singapore - Luxembourg (Replacing the 1993 tax treaty)

This tax treaty was signed on 9 October 2013.

  • Distributive rules

With regards to dividends, the exclusive taxation right is now allocated to the residence country (the old tax treaty provided the source country with the possibility to levy a withholding tax at a rate of 5% or 10% under certain conditions). There are no holding requirements. The treaty only requires that the recipient of the dividend is the beneficial owner.

Withholding tax rate

Dividends

Interest

Royalties

 1993 Treaty

 5%/10%

10%

 10%

 New treaty

 0%

0%

 7%

As depicted above the new tax treaty is very advantageous compared to its predecessor. In all situations regarding dividends, interest and royalties, the withholding tax has been decreased. In addition, trustees that are liable to tax in a Contracting State in respect of dividends, interest and royalties, shall be deemed to be the beneficial owner of such income. As a result, trustees can benefit from treaty protection in relation to these types of income.

Another benefit under this tax treaty is regarding capital gains taxation. Indeed, gains realized on the alienation of shares, including shares in a property company, shall be taxable only in the residence country of the alienator. This opens the door to interesting tax planning opportunities for real estate investments situated in Singapore and owned by Luxembourg companies through property companies.

  • Residence

The new treaty explicitly confirms that undertakings for collective investments (UCIs) (e.g. société d’investissement à capital variable (SICAV) and société d’investissement à capital fixe (SICAF)) can be considered as residents under the treaty if they are liable to tax under their domestic tax rules. UCIs are also considered liable to tax if they are subject to the tax laws of their Contracting State but are exempt from tax only if they meet all the requirements for exemptions specified in the tax laws of that Contracting State.

  • Elimination of double taxation

In relation to dividend distributions, dividends derived by a Luxembourg company can be exempt in Luxembourg if such company holds directly at least 10% of the capital of the Singaporean company since the beginning of the financial year and if the Singaporean company is subject to a tax that is comparable to the Luxembourg corporate income tax. It is important to mention here that the “subject to a comparable tax” condition does not have to be satisfied if the company is exempt or taxed at a reduced rate in accordance with Singaporean laws providing incentives for the promotion of economic development in that country. In addition, there is also the advantage of the holding period requirement (since the beginning of the financial year) compared to the 12 months requirement under Luxembourg law for the participation exemption to apply. 

  • Other remarks

In relation to insurance companies, it is no longer required for them to have a permanent establishment in the other Contracting State for the premiums they collect or the risks they insure in that other State.

The new convention no longer contains the provision on tax sparing credits.

 

Andorra – Luxembourg

This tax treaty was signed on 2 June 2014.

  • Distributive rules

The withholding tax on dividends can be 0% if there is a direct shareholding of at least 10% or at least an acquisition cost of EUR 1,200,000 and an uninterrupted holding period of 12 months. Under Luxembourg law the same requirements apply for a 0% rate, but also the condition for the parent company to be subject to an income tax comparable to the Luxembourg income tax. Therefore, the treaty can be more advantageous in this sense.

The withholding tax may be 5% provided there is a direct shareholding of at least 10% and in all other cases it shall be 15%.

The Protocol explicitly mentions that, in the case of Luxembourg, “dividends” will include the investor's share of the profit in a commercial, industrial, mining or craft undertaking paid proportionally to the profits (bailleurs de fonds), as well as certain interest payments on certain profit participating debts.

 Withholding tax rate

 Dividends

Interest

 Royalties

 

0%/ 5%/15%

0%

 0%

  • Residence

UCIs and pension funds, which have legal personality for tax purposes shall be considered as residents under the tax treaty. Luxembourg SICAVs and SICAFs will benefit from tax treaty protection.

 

Croatia – Luxembourg

This tax treaty was signed on 20 June 2014.

  • Distributive rules

Although this tax treaty does not allow a 0% withholding tax on dividends, a 5% withholding tax levied in the case where the beneficial owner holds directly at least 10% of the shareholding, can still be considered advantageous, for instance, as no minimum holding period is required in contrast to Luxembourg law. A 15% rate is levied in all other cases.

Noteworthy is that the tax treaty explicitly mentions that in the case of Luxembourg “dividends” will include the investor's share of the profit in a commercial, industrial, mining or craft undertaking, paid proportionally to the profits (bailleurs de fonds) as well as certain interest payments on certain profit participating debts.

Unlike the other newly ratified tax treaties, a withholding tax of up to 10% on interest can be levied on interest payments from one Contracting State to the other. However, a 0% withholding tax may apply if interest is paid to a (Luxembourg) bank or UCI.

 Withholding tax rate

 Dividends

Interest

 Royalties

 

5%/15%

0%/10%

 5%

One particularity under the tax treaty is the treatment of alienation of shares in property companies. In general, the sale of shares in property companies which derive 50% or more of their value from immovable property shall be taxable in the situs state. However, this rule does not apply to gains realized on the alienation of shares of such companies that are listed on an approved stock exchange of one of the States, nor does it apply to gains realized under corporate reorganizations or where the immovable property from which the shares derive their value is immovable property in which a business is carried on.

  • Residence

It is explicitly mentioned that UCIs with tax personality will not only be considered as residents but also as the beneficial owners of the income they derive. As a result, Luxembourg UCIs have access to tax treaty protection.

 

Estonia – Luxembourg (Replacing the 2006 tax treaty)

This tax treaty was signed on 7 July 2014.

  • Distributive rules

Regarding dividends, distributions can be subject to 0% withholding tax as long as there is a direct holding of at least 10% held by the parent company in the distributing subsidiary. In any other cases there shall be a 10% withholding tax rate.

In comparison to the 2006 tax treaty, the withholding tax rates and requirements have been lowered and thus are more advantageous. For instance, in order to obtain a reduced rate under the 2006 tax treaty, it was required to have at least a 25% direct shareholding in the company paying the dividends. Also, interesting to note is that no 12-months requirements has to be met in order to obtain the 0% rate.

For interest and royalties, the exclusive taxation right is now allocated to the residence country. Previously, the source country had the possibility to levy a withholding tax up to 10% on interest and a 5%/10% withholding tax on royalties.

 Withholding tax rate

 Dividends

Interest

 Royalties

2006 Treaty 

5%/15%

10%

 5%/10%

New Treaty

0%/10%

0%

0%

In principle, capital gains realized on the alienation of shares in a property company may be taxed in the source country, however, the right to tax will be allocated only to the resident country if the capital gains are in relation to the alienation of shares quoted, for instance, on a stock exchange of an OECD or EEA Member State.

  • Residence

UCIs, which are established in a Contracting State, shall be considered as a resident of that Contracting State and as the beneficial owner of the income they derive.

Whilst the 2006 tax treaty did not allow UCIs to be considered as residents under that treaty, now certain Luxembourg UCIs like the SICAFs and SICAVs can be treated as residents and therefore benefit from treaty benefits under the new tax treaty. The treaty also specifically mentions the investment company in risk capital (or société d’investissement en capital à risque or SICAR) and the collective investment fund (fonds commun de placement or FCP) as UCIs that qualify as residents. In addition, the competent authorities of both countries can agree to expand the list of UCIs benefiting from treaty benefits.

 

United Arab Emirates (UAE) – Luxembourg

  • Distributive rules

Under the new rules on capital gains, gains derived from the alienation of shares and securities are only taxable in the seller’s country only if they are listed on a recognized stock market of a Contracting State. Furthermore, all other gains derived from the alienation of shares and securities shall be taxable only in the State of residence of the seller.

The list of UAE institutions qualifying as (governmental) “financial institutions”, which can benefit from Luxembourg sourced dividend distributions free of withholding tax, has been expanded and now also the following institutions are covered:

  • International Petroleum Investment Company
  • Abu Dhabi Investment Council
  • Mubadala
  • TAQA
  • Investment corporation of Dubaï
  • Elimination of double taxation

Under the new treaty, dividends derived by a Luxembourg company, which holds directly more than a 10% shareholding in an UAE company, which is subject to an income tax comparable to the Luxembourg income tax, since the beginning of the accounting year, are exempt in Luxembourg. This exemption is also available even if the UAE company – which is engaged in agricultural, industrial or touristic activities in the UAE and dividends are generated out of these activities – is exempt or subject to low taxation. Therefore, this exemption is more beneficial considering the applicable conditions under the Luxembourg participation exemption. That is, on the one hand, the holding period requirement under the new treaty (since the beginning of an accounting year) can be met more easily and, on the other hand, the “subject to a comparable tax” condition doesn’t apply if the UAE company carries out the activities mentioned above.

 

Conclusion

 

This legislative process proves that Luxembourg always looks to expand and improve its treaty network, by doing so, it is creating and enhancing bilateral economic relationships with other countries. In addition, Luxembourg is not only a strong location for establishing business, but it is also striving to stay in line with internationally agreed standards, such as the OECD. The policy of Luxembourg to negotiate access to tax treaty protection for investment funds defined as UCIs is remarkable.

 

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

 

 

  

 

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.

Connect with us

 

Request for proposal

 

Submit