Analysis of new Germany-Luxembourg tax treaty
The aim of the new Germany-Luxembourg double tax treaty (DTT) is to replace the one signed in 1958, and follows the structure and, for the most part, the content of the OECD Model Tax Convention.
Under the new DTT, dividends will be subject to a withholding tax (WHT) of maximum:
5% in case the beneficial owner holds at least 10% of the capital of the subsidiary; and
15% in the other cases.
These provisions are more beneficial than the ones outlined in the old DTT, which provided a WHT of 10% in case of a shareholding of 25%, and 15% in the other cases.
However, a specific provision has been included for real estate investment companies. Based on this provision, dividends arising from real estate investment companies will be subject to a WHT of max 15% (so that the 5% and 15% max rates mentioned above will not apply), to the extent the real estate investment company is fully or partly exempt from tax or can deduct its distributions when computing its profit.
The aim of this provision is to make sure that distributions made by German REITs are still, as in the past, subject to a WHT of 15% on their distributions. It may however affect a prospective REIT regime to be introduced in Luxembourg in the future, if Luxembourg also decides to subject these vehicles to a WHT on their distributions.
Interests will only be taxable in the country of the recipient, thus cannot be subject to WHT. This was already the case under the old DTT.
Royalties will be subject to a WHT of max 5%, which is also the rate applicable under the old DTT.
Capital gains & real estate companies
The new DTT includes a specific provision, according to which capital gains derived by a resident of a contracting state from the alienation of shares and similar rights in a company, deriving more than 50% of its value directly or indirectly from immovable property situated in the other contracting state, may be taxed in that other state.
This means that capital gains realised by Luxembourg residents on the sale of shares (and similar rights) in German real estate companies, which invest in German real estate, will now be taxed at source, such as in Germany.
So far, these gains were exempt from taxation in Germany and potentially also exempt in Luxembourg under the participation exemption regime and under certain conditions. German real estate investment structures will therefore have to be carefully reviewed.
Application of some DTT provisions to collective investment vehicles (CIVs)
The new DTT is the first Luxembourg DTT, which provides expressly (in its protocol) that it will apply to CIVs. This follows the OECD report The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles.
As far as Luxembourg FCPs and German Sondervermögen are concerned, they may claim the benefits of articles 10 (dividends) and 11 (interest) to benefit from the reduced WHT rates on dividends and the exemption of WHT on interest, to the extent their units are held by persons, who are resident in the country, in which the FCPs/Sondervermögen are established.
Luxembourg SICAVs, SICAFs and SICARs will be able to claim the provisions of articles 10 (dividends) and 11 (interest) to benefit either from the reduced WHT rates on dividends or from the exemption of WHT on interest.
Methods to avoid the double taxation
Germany generally applies an exemption system to avoid double taxation.
As far as dividends are concerned, the exemption system applies only to the extent the German parent company is a corporation, which holds directly at least 10% of the shares of the Luxembourg company. In the other cases of dividend distributions, the credit method will apply.
Luxembourg generally applies the exemption method. The credit method however applies to dividends, royalties and income of artists and sportsmen.
Entry into force
The new DTT will apply to taxes in relation to the calendar year which follows the entry into force in 2013 at the earliest.
The new DTT is welcomed, as it will ensure that Germany and Luxembourg will now have a DTT which generally follows the OECD Model Tax Convention. The latter is good news as it generally simplifies questions of treaty interpretation and provides, in most cases, more legal certainty to taxpayers. Positive developments introduced by the new DTT are the new maximum WHT rate on dividends and the granting of DTT benefits (which becomes much clearer now) to CIVs. The new DTT, however, will have an impact for German real estate investment structures. We recommend that taxpayers carefully review the investment structures they already have in place with their tax advisers or reconsider any structuring of German real estate investments for the near future.
Atoz - Taxand
Tel: +352 26 940 1
Fax: +352 269 40 300