LUXEMBOURG: DOUBLE TAX TREATIES

Luxembourg Treaty Provisions

Luxembourg has signed Double Tax Treaties with more than 50 other countries, following the OECD Model Tax Convention, although the treaty with the US contains 'Savings' and 'Limitation of Benefits' clauses which can negate the purpose of the treaty in some circumstances.

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.

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.

In November 2001 the US Internal Revenue Service confirmed that the authorities of the United States and Luxembourg had entered into a mutual agreement concerning the interpretation of the transition rules of a new 'convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital' that was signed in Luxembourg in April 1996 and entered into force on December 2000.

The agreement covers issues such as taxes withheld at source, tax relief on income and property. The IRS states that it has laid out the transition rules in order to resolve potential ambiguities and to fulfill the need to provide certainty to taxpayers.

It adds: 'Taxpayers that did not exist prior to the date of entry into force of the 1996 Treaty, and taxpayers that were in existence but did not qualify for benefits under the 1962 Treaty, will not be entitled to claim the benefits of the 1962 Treaty.'

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.

Welcoming the agreement, Dr Mohamed Khalfan bin Khirbash observed that: "This agreement will help provide equal taxation treatment to investors in the UAE and Luxemburg. Moreover, it provides an environment that stimulates foreign direct investment, encourages business ventures, and enhances the cooperation along with the economic growth levels within the two countries. Further, it contributes new common projects that benefit the national economic outcomes of the two countries."

"Moreover, the agreement encourages tourism and bilateral trade between the two countries especially after the implementation of income and profit tax exemption regulations granted to national air cargo companies. Emirates airlines, Al Ittihad, Air Arabia, and any air transportation company will benefit from such exemptions."

The treaty was ratified in May 2009 and went into force on January 1, 2010.

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. Note also that Luxembourg 1929 Holding Companies of all three types are not covered by Double Tax Treaties.

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 was scheduled to come into force on April 1, 2008 in Hong Kong, and on January 1, 2008 in Luxembourg.

Then 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 DTAA 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 DTAA 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 will allow 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 recent 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.

Following the signing of the agreement, Luxembourg will no longer appear on the list of countries which, according to a royal Spanish decree, define tax havens.

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Luxembourg Other International Agreements

In December, 2005, the government of Mauritius signed an agreement on the Reciprocal Promotion and Protection of Investments (IPPA) with the Belgium-Luxembourg Economic Union, which was aimed at strengthening bilateral and economic ties between the countries, and facilitating investment and mutual trade.

The agreement was signed in Belgium by the Mauritian Minister of Foreign Affairs, International Trade and Cooperation, Madun Dulloo, the Minister of Foreign Affairs of the Kingdom of Belgium, Karel De Gucht, and the Ambassador of the Grand Duchy of Luxembourg in Belgium, Alphonse Berns.

Other issues of cooperation were discussed, including development aid to Mauritius through an economic resilience index, investment in sectors like development of bio-fuels, and assistance in the training and specialization of medical practitioners.

Following the signature ceremony held at the Belgian Ministry of Foreign Affairs, the head of the Mauritian delegation, Minister Dulloo made a statement in which he emphasized the necessity for such an agreement especially with the current reform of the EU Sugar Regime and the serious difficulties facing the Mauritian tourism and textile industry.

Mr. Dulloo also pressed Belgium and Luxembourg to provide more direct private investment from Luxembourg and Belgium and presented the increased opportunities in ICT, fisheries and financial services.

The Belgian Foreign Affairs Minister, Mr. De Gucht, expressed confidence that the Belgian authorities would consider including the issues discussed in bilateral cooperation with Mauritius, while Ambassador Berns highlighted the importance of the IPPA for investors and the private sector.

In January 2010, at a seminar, a delegation from the Dubai International Finance Centre and Luxembourg for Finance, the agency responsible for developing the financial sector in Luxembourg, signed a Memorandum of Understanding (MoU) to promote cooperation and industry development across a wide range of areas – including market access, financial regulations and infrastructure, training, and industry development for firms located in the two jurisdictions.

Some of the MoU’s key areas of focus include promoting the exchange of information on banking, financial services and securities legislation and regulation; sharing trends in financial services and products; and promoting events taking place in the two jurisdictions. Other areas include welcoming delegations from each jurisdiction, cooperating in financial services training and facilitating collaboration among universities located in the two jurisdictions.

At the seminar it was noted that the two financial centers are complementary; the DIFC is a leading financial center and a global gateway for capital and investment in a region stretching between Europe and Asia, while Luxembourg is the second largest investment fund center in the world and the Eurozone’s premier hub for private banking.

Ahmed Humaid Al Tayer, Governor of the DIFC, said: “By working with other leading international financial centers such as Luxembourg, the DIFC brings business opportunities and a continually expanding scope of financial products and services not only to DIFC-based firms, but also to the UAE and wider region. Luxembourg is a natural partner for DIFC, with each center’s strengths complementing those of the other, and opening many possibilities for cooperation among our regulators, as well as among the many firms located in our two jurisdictions.”

Fernand Grulms, CEO of Luxembourg for Finance, added: “Between Luxembourg and Dubai we see huge potential for bilateral business. However, in the complex world of finance, this can only be achieved by building partnerships among foreign financial centers, so that’s why we are pleased to be here today and to have signed this memorandum with DIFC. Luxembourg has enormous expertise to offer clients in the region and opportunities for collaboration with firms based in the MENA region.”

“International investors, including sovereign wealth funds from the MENA region, rely on Luxembourg’s expertise to structure their worldwide investments, namely in the area of real estate and private equity,” Grulms added. “For example, local know-how in setting up, administering and distributing investment funds has led the Bank of London and the Middle East to launch a Shari’ah-compliant dollar income fund from Luxembourg.”

Another MoU, aimed at strengthening and developing economic, trade and technical cooperation between the Kingdom of Bahrain and the Grand Duchy of Luxembourg, was signed in January 2010 in Manama by Bahrain’s Minister of Finance, Shaikh Ahmed bin Mohammed Al Khalifa, and Luc Frieden, the Luxembourg Minister of Finance.

The several areas envisaged for strengthened cooperation between the two countries include financial and professional services, investment, tourism, trade, industry, transport, telecommunications, education, and scientific research.

The MoU will encourage relevant businesses to explore the possibility of joint projects in these areas, and establishes a joint economic committee to coordinate its implementation.

Both ministers praised the MoU and its crucial role in boosting bilateral relations between Bahrain and Luxembourg. It adds its weight to the agreement for the promotion and protection of investments, previously signed by the two countries in 2006, and the convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes, signed in 2009.

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