While most of the protocols only aim to bring the exchange of information provisions of existing DTTs in line with OECD standards, the protocol to the Luxembourg-France Double Tax Treaty, the ratification process of which has been closely followed, amends the rules dealing with the taxation of capital gains on the sale of shares in property companies. The main aspects to the changes introduced by these new DTTs and protocols are presented below. The new DTTs generally follow the OECD Model Tax Convention.
As far as residence is concerned, according to the DTTs concluded with Andorra, Croatia and Singapore, companies are, in case of conflict, considered as resident in the country in which their place of effective management is located, which is in line with the current version of the OECD Model Tax Convention. However, with Estonia conflicts of residence of companies have to be settled by the contracting states by mutual agreement, meaning that the 2 countries will have to agree on the country in which the company will be considered as resident for DTT purposes. Even though solving conflicts of the tax residence by mutual agreement of the competent authorities is in accordance with the latest draft recommendations under the ongoing BEPS (Base Erosion and Profit Shifting) work, leaving it to the contracting states to solve these issues is an approach which runs the risk of being impractical and which means a lot of legal uncertainty for tax payers.
Position of Collective Investment Vehicles (CIVs) towards treaty benefits
As far as investment funds are concerned, the 4 new DTTs include specific provisions granting expressly treaty benefits to Undertakings for Collective Investment (UCI), which is good news. Under the new Andorra DTT and the new Croatia DTT, Luxembourg SICAVs and SICAFs will be treated as resident under the DTT and will benefit from the same withholding tax (WHT) rates as any other Luxembourg fully taxable company. Luxembourg FCPs, on the other hand, since they have no legal personality, will be considered as resident for DTT purposes but will only benefit from the rates applicable to Luxembourg individuals, which are generally higher. According to the new Estonia DTT, a UCI will be considered as a resident for DTT purposes and as the beneficial owner of the income received. The protocol states further that UCI covers SICAVs, SICAFs, SICARs and FCPs as well as any other UCI which the contracting States agree to consider as such. Finally, under the Singapore DTT, a collective investment vehicle is a resident of a Contracting State if, under the domestic laws of that State, it is liable to tax, even if it is exempt from tax if it meets all the requirements for exemption specified in the tax laws of that Contracting State. This means that SICAVs and SICAFs will be treated as resident under the new Luxembourg-Singapore DTT.
Withholding tax rates
As far as withholding tax rates are concerned, the table below presents the maximum rates that countries may levy, under certain conditions, under the new DTTs with Andorra, Croatia, Estonia and Singapore:
|Andorra DTT||0%/ 5%/ 15%||0%||0%|
|Croatia DTT||5%/ 15%||10%||5%|
|Estonia DTT||0%/ 10%||0%||0%|
Capital gains taxation
As far as the tax treatment of capital gains is concerned, the DTTs with Andorra, Croatia and Estonia include a provision according to which gains arising from the sale of shares in an immovable property company are taxable in the country in which the immovable property is located. Under the Luxembourg-Singapore DTT, these gains are taxable as any other gains realised upon the sale of shares, meaning that they are only taxable in the country of the seller.
Changes introduced by amending protocols
The protocol to the United Arab Emirates – Luxembourg protocol amends the provisions of the DTT dealing with capital gains, the provisions on the methods to avoid double taxation, and finally the ones on exchange of information, in line with the OECD standard on exchange of information upon request.
The protocol to the France-Luxembourg DTT amends the rules applicable to capital gains realised upon the sale of shares units or other rights in real estate companies and allocates the right to tax these gains to the source country (i.e. country in which the real estate is situated). So far, under the current DTT provisions, capital gains realised on the sale of shares in real estate companies were taxed at the place of the residency of the seller. In other terms, gains derived by a Luxembourg company from a French property company holding French real estate were exempt in France and only taxable in Luxembourg. In Luxembourg, they could possibly benefit from the Luxembourg participation exemption regime. With the new provisions of the protocol, capital gains derived by a Luxembourg company from a French property company will become taxable in France. Particular attention has to be given to the wording of this new provision. The wording goes beyond the recommendations of the OECD in its Model Tax Convention. While the latter covers only capital gains on the alienation of shares or comparable interests, the Protocol covers shares as well as any other rights.
The Protocols to the DTTs concluded with Ireland, Lithuania, Mauritius and Tunisia mainly amend the exchange of information provisions of the DTTs to bring them in line with the OECD standards on exchange of information upon request.
Luxembourg keeps on expanding its DTT network. The fact that Luxembourg now almost systematically includes specific provisions on CIVs in its new DTTs, in order to clarify tax treaty benefits, is positive as it will most probably increase the number of situations in which Luxembourg CIVs will be able to benefit from reduced rates when they invest abroad. The amendment introduced by the protocol to the France-Luxembourg DTT requires a careful review of existing investment structures in French real estate so as to mitigate any potential adverse tax consequences.
The ratification process of this protocol has been followed closely, given its impact on existing and future investments in French real estate. Now that the ratification process has started both in Luxembourg and in France, it can be expected that the new rules will become applicable in 2016, meaning that investors with real estate investment structures in France or which plan to invest in French real estate should seek advice from their tax adviser quickly.