After Israel, the tax treaty with Turkey has recently published and will enter into force on January 1 2006. The treaty is largely based on the OECD model.

The treaty provides for 20% withholding tax rate on dividends paid out of Turkey, reduced to 10% if the Luxembourg beneficial owner company owns at least 25% in the share capital of the payee. Interest will be subject to 15% withholding tax in Turkey, reduced to 10% if the loan maturity is over two years and royalties will be subject to a 10% withholding tax when paid by a Turkish company.

The treaty introduces a branch tax (10%) where a Luxembourg company operates in Turkey through a permanent establishment. This tax is levied in addition to the Turkish income tax applicable on the permanent establishment income.

The draft bill in relation to the approval of the tax treaty with Latvia has been submitted to the Luxembourg parliament and the tax treaty with the United Arab Emirates has been initialled.

Holding 1929 companies

The Luxembourg Parliament has approved the reform on the Holding 1929 companies. Such a regime was criticized in a European context as it appeared as harmful tax competition. In effect Holding 1929 companies were not subject to corporate income tax at all. With effect on July 1 2005 the beneficial tax regime will be denied to companies which derive at least 5% of dividends from foreign companies that are not subject to tax comparable to Luxembourg corporate income tax. This would be the case if the foreign subsidiary is not subject to an income tax rate of at least 11% and/or the taxable base of which is not calculated in a manner similar to Luxembourg tax.

Holding 1929 companies incorporated before the law enters into force, that is, July 1 2005, would be subject to a grandfather rule until January 1 2011.

Olivier Remacle (olivier.remacle@atoz.lu), Luxembourg