News › Taxand’s Take Article

Luxembourg expands treaty network with new DTTs and protocols

Luxembourg

The long awaited protocol to the France Luxembourg double tax treaty (DTT) was signed on 5 September 2014. In addition, Luxembourg continues to expand its DTT network with the ratification of 5 new DTTs, 2 protocols to existing DTTs and a DTT entered into with Taiwan. Taxand Luxembourg presents the main features of these new DTTs and protocols.

New treaty protocols

New protocol to France-Luxembourg DTT
The protocol amends the allocation rules of the taxation of capital gains on real estate companies, allocating the right to tax these gains to France instead of Luxembourg in the current DTT.

The protocol provides that capital gains derived by a resident of Luxembourg or France which receives more than 50% of their value from real estate assets, located in the other contracting state, are taxable in the source country (country in which the real estate is located). In other words, these gains are taxed in the same way as real estate income. Real estate assets allocated to the business activity of an enterprise are excluded from the clause.

Under the current provisions of the DTTs, capital gains derived on the shares from real estate companies are taxed at the place of the residency of the seller. In other words, gains derived by a Luxembourg company from a French property company were exempt in France and taxable in Luxembourg and could possibly benefit from the Luxembourg participation exemption. With the new provisions, capital gains derived by a Luxembourg company from a French property company will be taxable in France.

Protocol to the DTT with Denmark
As a main change, the protocol amends art. 18 (pensions) of the DTT in favour of the state of source.

Protocol to DTT with Slovenia
The protocol brings the exchange information clause in line with OECD standards.

New double tax treaties

DTT with Saudi Arabia
The protocol to the new Saudi Arabia Luxembourg DTT provides that collective investment vehicles (CIVs) are considered as residents and beneficial owners of the income they earn. No distinction is made between CIVs in corporate form (SICAVS / SICAFs) and in contractual form (FCPs).

In line with the OECD Model Tax Convention (MTC) in its current form, the DTT with Saudi Arabia provides that capital gains derived by a resident of Luxembourg/Saudi Arabia from the alienation of shares in real estate companies are taxable in the country in which the real estate is located.

DTTs with Guernsey, Jersey & Isle of Man
The DTTs entered into with these 3 Crown Dependencies have similar provisions. Under the 3 DTTs, body corporate CIVs are considered as residents and beneficial owners of the income received while CIVs in other forms are considered as individual residents and beneficial owners of the income received. This means that SICAVs/SICAFs will be able to benefit from the same reduced withholding tax rates as ordinary fully taxable Luxembourg companies. Whereas FCPs, since they are tax transparent, will be subject to the maximum rate applicable to individuals (which is higher).

As far as capital gains derived from the disposal of shares in real estate companies are concerned, they are treated as gains on the sale of movable property, meaning that they are only taxable in the country of the seller. If the seller is a Luxembourg company, the gains can benefit, under certain conditions, from the domestic exemption regime.

DTT with the Czech Republic
The Protocol to the DTT states that the term "resident of a Contracting State" also includes a fiscally non-transparent person (including a CIV) that is established in that State according to its laws, even in the case where the income of that person is taxed at a zero rate in that State or is exempt from tax there. This provision means that Luxembourg SICAVs and SICAFs benefit from the DTT provisions. FCPs, since they are fiscally tax transparent, are not entitled to the benefits of the DTT.

As far as capital gains derived from the disposal of shares in real estate companies are concerned, they are treated as gains on the sale of movable property, meaning that they are only taxable in the country of the seller.

New tax agreement

Tax agreement with Taiwan
As far as persons other than individuals are concerned, the resolution of conflicts of residence follows the terms of the alternative provisions suggested by the commentaries to the OECD MTC. In the case of conflict of residence a mutual agreement procedure is necessary to determine the place of effective management.

The protocol to the agreement provides that a CIV in corporate form for tax purposes shall be considered as a resident of the territory in which it is established and as the beneficial owner of the income it receives. Luxembourg SICAVs/SICAFs will therefore be able to obtain treaty benefits. However, dividends and interest received by CIVs suffer a higher withholding tax rate than the one applicable to other recipients (15% WHT as opposed to 10%).

The DTT deviates from the OECD MTC whereby capital gains derived from real estate companies are only taxable in the country of the seller, ie there is no taxation at source.

Discover more: Further information on Luxembourg protocol and treaty updates > 


Your Taxand contacts for further queries are:
Keith O’Donnell
T. +352 26 940 257
E. keith.odonnell@atoz.lu

Emilie Fister
T. 
+352 26 940 263
E. 
Emilie.Fister@atoz.lu

Taxand's Take

These new DTTs and protocols share some common features with the OECD standards on exchange of information matters and the granting of treaty benefits to collective investment vehicles (CIVs). Multinationals should monitor all recent OECD Base Erosion and Profit Shifting Action Plan developments to ensure these don’t have an impact on any current DTTs.

Specifically in terms of the recent amendment to the France Luxembourg DTT, multinationals should conduct a careful review of existing investment structures in French real estate so as to mitigate any potential adverse tax consequences. If both countries manage to complete the ratification procedures before year-end, the protocol will enter into force on 1 January 2015, which means that Luxembourg multinationals with real estate investment structures in France or with plans to invest in French real estate should investigate the tax implications thoroughly and vice versa. 

Taxand's Take Author

Keith O'Donnell
Taxand Board member & Taxand global real estate tax service line leader
Luxembourg

Access Taxand's Take

Access Taxand's Take

Register to receive Taxand’s latest opinion on topical tax news

Discover More

Discover More

Access our Taxand's Take archive to discover more about the topical tax issues affecting multinationals