Luxembourg: Double Tax Treaties
As of September 2013, Luxembourg has signed 80 Double Tax Treaties, following the OECD Model Tax Convention.
Broadly speaking the Tax Treaties provide that corporate entities are charged to tax in the country in which they are resident (the Treaties contain 'tie-breaker' clauses to resolve cases in which both countries assert residence), except that if an entity which is resident in one country has a permanent establishment in the other country then the income from that permanent representation is taxed in the second country. Individual taxation likewise follows residence, but in the cases where income could be taxed twice, there is either a 'tie-breaker' clause or a provision offsetting tax paid in one country against tax due in the other on the same income, although the treaty with the US contains 'Savings' and 'Limitation of Benefits' clauses which can negate the purpose of the treaty in some circumstances.
The Tax Treaties normally provide that withholding tax on dividends is at a lower rate than usual (15% rather than 25% for instance), and that when there is a substantial participation (usually 25% or greater) an even lower or even zero rate is applied. Likewise, reduced rates of withholding tax are applied to interest and royalty payments (of course Luxembourg doesn't apply withholding tax to interest in any case).
Tax paid in one country is normally allowed as a credit against tax due on the same income in the other country.
Income from property is usually taxed in the country in which it is situated.
NB: This section gives some very brief and general details about Double Tax Treaties; it is essential to refer to the individual treaties as regards any particular case or situation.
In March, 2005, a double tax treaty was signed with Israel.
In November, 2005, government officials from the United Arab Emirates and Luxembourg put their signatures to a new double taxation avoidance agreement intended to boost bilateral trade and investment between the two states.
The treaty was ratified in May 2009 and went into force on January 1, 2010.
In November 2007, Hong Kong and Luxembourg signed a comprehensive agreement on the avoidance of double taxation.
The agreement aimed to help foster closer economic and trade links between the two places, and provide added incentives for Luxembourg enterprises to do business or invest in Hong Kong.
The agreement came into force on April 1, 2008 in Hong Kong, and on January 1, 2008 in Luxembourg. A protocol on the exchange of information was signed on November 11, 2010.
In June 2008, it was announced that the governments of India and Luxembourg had signed an agreement covering the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital.
The DTA between India and Luxembourg was designed, in the case of India, to cover income-tax and wealth tax including any surcharge thereon. In the case of Luxembourg, it would cover income tax on individuals, corporation tax, capital tax, and the communal trade tax, it was announced at the time.
The DTA also addressed the tax treatment of dividend, interest, royalties and fees for technical services-both in the country of residence as well as the country of source.
On April 28, 2009, Luc Frieden, Luxembourg's finance minister, announced that Luxembourg had reached agreement on the details of an accord with the USA to modify their 1996 Double Taxation Treaty.
This accord allows for exchange of tax relevant information between the tax authorities on demand for specific cases determined in accordance with the agreement.
This agreement was the first to be concluded since Luxembourg announced it would implement OECD standards of information exchange on March 13, 2009. As a financial hub for the region, it had been under considerable pressure, especially from its neighbours Germany and France, to conform to these standards.
In May 2009, Luxembourg signed a convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income with Bahrain. The treaty provides for the exchange of information in tax matters in adherence to the OECD standard.
On May 22, 2009, the governments of Luxembourg and Liechtenstein announced their intention to enter into negotiations to conclude an OECD model convention on the avoidance of double taxation. The agreement was signed later that year.
Luxembourg concluded a new tax agreement with the Netherlands on May 29, 2009. The agreement will provide for the exchange of information in tax matters between the two countries in accordance with the OECD standard.
A statement from Luxembourg’s Ministry of Finance said that the protocol, which amends the existing double tax convention of May 8, 1968, provides for the exchange of information on request in individual cases between the tax administrations of both countries. It applies to tax years 2010 and following and has no retroactive effect. The agreement does not seek an automatic exchange of bank information and does not allow for general inquiries, or so called ‘fishing expeditions’.
Luxembourg signed a new tax cooperation agreement with France in June, 2009, amending their 50 year old tax treaty to allow for exchange of tax information.
French Economy Minister Christine Lagarde told reporters after signing the deal that: "I am unable to say how many hundreds of thousands, perhaps millions, of euros we shall recover as a result, but we shall recover all we can", she vowed.
Luxembourg and Finland signed a protocol in July 2009 amending the treaty of March 1, 1982 between Finland and the Grand Duchy for the avoidance of double taxation and the prevention of tax evasion regarding taxes on income and capital.
The protocol provides for exchange of information upon request between the tax administrations of both countries, and will apply as of the tax year 2010. It is not intended as an automatic exchange of banking information and does not allow for general requests or so-called ’fishing expeditions’.
A protocol amending the double taxation avoidance agreement between the UK and Luxembourg to facilitate the exchange of information for tax purposes between the two governments was signed in London on July 2, 2009.
The new Protocol updates the exchange of information article of the existing double tax convention to bring it into line with current OECD standards.
The Protocol will enter into force once both countries have completed their legislative procedures and will take effect for tax years beginning on or after January 1 of the calendar year following its entry into force.
Under paragraph 1 of the Protocol, the competent authorities of the Contracting States shall exchange such information as is “foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention.”
Paragraph 2 stipulates that any information received under paragraph 1 by a Contracting State “shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above.”
Paragraph 2 concludes: “Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.”
Also in July 2009, the State of Qatar and the Grand Duchy of Luxembourg signed a double taxation agreement on the avoidance of double taxation and the prevention of tax evasion regarding taxes on income and capital.
Later that month, Austria and Luxembourg signed an accord to amend an existing double taxation treaty so that it provides for the exchange of tax information.
On July 27, 2009, the Principality of Monaco signed a convention for the avoidance of double taxation and fiscal evasion with Luxembourg.
The agreement incorporates provisions for the exchange of tax information between the two countries’ tax authorities in accordance with the OECD standard. The agreement lays the foundation for tax distribution rights on investment and trade carried out by businesses and individuals in the respective countries, and the parties hope that it will facilitate enhanced cooperation in several areas including the fight against money laundering, terrorist financing, and corruption.
During a meeting held in Berlin in November 2009, German Finance Minister Wolfgang Schäuble and his Luxembourg counterpart Luc Frieden agreed to include the Organization for Economic Cooperation and Development’s (OECD) standard on tax information exchange in their bilateral double taxation agreement (DTA).
In accordance with the OECD standard, both countries agreed to exchange information in tax matters upon request.
The corresponding protocol to amend the DTA was signed in Luxembourg in December 2009.
Also in November 2009, Luxembourg’s Finance Minister Luc Frieden and his Spanish counterpart Elena Salgado Mendez, signed an amendment to the existing bilateral double taxation agreement (DTA) in place between the two countries on the sidelines of a European Council of Finance Ministers (Ecofin) meeting.
In accordance with the OECD standard, the revised DTA provides for an exchange of information between the respective tax authorities upon request in specific cases. It entered into force on January 1, 2011.
A new double tax agreement with Germany was signed on April 23, 2012. The new agreement conforms to OECD standards and replaces the current treaty that was signed in 1958.
The Luxembourg Government has recently approved tax accords for the prevention of double taxation with Guernsey, Jersey, the Isle of Man, Saudi Arabia and the Czech Republic.
At the same time the Governing Council agreed to the automatic information exchange pertaining to five categories of income and capital. The five categories cover income from employment, director's fees, life insurance products and pensions as well as ownership and income from immovable property.