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Keith O'Donnell |
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Samantha Nonnenkamp |
Luxembourg continues to sign new ex-change of information protocols with its treaty partners, consistent with its status as an OECD white list country and continues to expand its treaty network. The two latest double tax treaties (DTTs)/protocols signed by Luxembourg are with Liechtenstein and Switzerland.
On August 25 Luxembourg and Switzerland signed an amending protocol for the revision of the previous treaty of January 21 1993. The main aim of this protocol is to extend the administrative assistance rules such that they are in line with the standard set in artilce 26 of the OECD model tax convention.
The protocol also includes several additional amendments as regards the taxation of dividends, the mutual agreement procedure and the exchange of information provisions.
As far as the taxation of dividends is concerned, the conditions for the application of the five percent reduced withholding tax and for the withholding tax exemption have been relaxed: the minimum shareholding that is required between distributing entity and recipient for these exemptions or reduced rates to apply, has been brought from 25% to 10%. The dividend tax treatment that will apply as soon as the protocol enters into force will be as follows:
Five percent withholding tax will apply to the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends;
Zero percent will apply if the beneficial owner of the dividends is a company (other than a partnership) which is a resident in the other contracting state which holds, during an uninterrupted period of two years preceding the date of payment of the dividends, directly at least 10% of the capital of the company paying the dividends. This provision only applies to dividends in respect of that part of the shareholding which has been uninterruptedly owned by the beneficial owner in the aforesaid period of two years.
Fifteen percent of the gross amount of the dividends applies in all other cases
No amendment has been made to article 13 (capital gain article). Thus, capital gains realised upon the sale of a shareholding in a real estate company remain only taxable in the country of the recipient of the gain and not in the country in which the real estate is situated, which is consistent with other recent Luxembourg treaties.
On August 26, Luxembourg and Liechtenstein signed their first DTT. The DTT follows the OECD model tax convention. Treaty rates are as follows:
Dividends: an exemption of dividend withholding tax is granted if the beneficial owner of the dividend is a company (but not a partnership) which owns at the time the dividend is paid, a direct shareholding of at least 10% or a shareholding with a an acquisition cost of at least €1.2 million ($1.7 million) in the company that distributes the dividend during a minimum time period of 12 months. The dividend withholding tax amounts to five percent if the beneficial owner of the dividend is a company (but not a partnership) which owns at least a 10% direct shareholding in the company that distributes the dividend and if the remaining conditions for the dividend withholding tax exemption as defined above are not fulfilled.
The dividend withholding tax amounts to 15% in all other cases.
Interest: the interest article provides that interests are only taxable in the country of the recipient. Thus, no withholding tax applies in the country of source. Royalties: the royalty article provides that royalties are only taxable in the country of the recipient. Thus, no withholding tax applies in the country of source.
Capital gains: capital gains realised upon the sale of a shareholding are only taxable in the country of the recipient. No exception to this rule applies to companies with real estate activities. Thus capital gains realised upon the sale of shares in a real estate company are also only taxable in the country of the recipient of the gain.
Luxembourg generally applies the exemption method to avoid double taxation. Regarding dividends arising from Liechtenstein, they are exempt in Luxembourg provided the company which is a resident of Luxembourg holds directly at least 10% of the capital of the Liechtenstein company paying the dividends since the beginning of the accounting year and the Liechtenstein company is subject to a taxation on its profits which is comparable to the Luxembourg corporate income taxation.
The shares in the Liechtenstein company are exempt from capital tax (that is are exempt from the 0.5% net wealth tax), under the same conditions. With the new treaty with Liechtenstein, Luxembourg has now 68 initialled/signed DTTs, among which 53 are in force at the moment.
Keith O'Donnell (keith.odonnell@atoz.lu), & Samantha Nonnenkamp (samantha.nonnenkamp@atoz.lu), Luxembourg
