Double Taxation Treaties

Preventing the double taxation of cross border income 

Tax Conventions - OECD - Limited taxation

A tax treaty generally defines which persons are liable to tax in one contracting state and how a person can be considered to be a resident of that state. A private individual is deemed to be a resident if he has his main residency based in the state (a tie break rule may be applied to determine the residency) while a Luxembourg company will be considered as a resident in Luxembourg under such a tax treaty if it has its place of management and control in Luxembourg.

A tax treaty then grants to one contracting state the right to tax particular income as defined in the treaty. Some income may be fully taxed in Luxembourg while other income may be taxed on a limited basis (meaning that a further taxation is also possible in another state). For instance profits realised by a company's branch established in Luxembourg will often be fully taxable in Luxembourg and enjoy the generous benefits of the Luxembourg Corporate Income Tax Laws. For other income such as dividends, interests or royalties, the treaty may reduce or cancel any withholding tax at source in Luxembourg.

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Withholding Tax at source - exemptions:

However, Luxembourg Corporation Tax Law does not withhold tax

  • on dividends when they are paid to foreign companies (if they are considered to be resident in a double tax treaty country, have held a stake of 10% for more than a year into the paying Luxembourg company); (some rule apply)

  • on dividends paid to European Union companies (same rules apply);

  • on any interest paid to non residents;

  • on any royalties

In such cases the double taxation treaty does not prevail on the Luxembourg Corporation Tax Law as the latter is more advantageous than the double tax treaty

Tax Credit - Tax Exemption for Luxembourg residents:

Under a tax treaty agreed by Luxembourg, some income is withheld at source in the country where this income is originated. The Luxembourg tax payer receives either:

  • a tax credit on his Luxembourg tax liability

  • a tax exemption which prevents the income from being taxed twice

Real Estate and double taxation treaties:

The double taxation treaties agreed  by Luxembourg generally grant the power of taxation of such income to the state where the head office is situated. This is applicable when the estate is held directly by a Luxembourg real estate company.

However, capital gains realised on shares held by a Luxembourg SOPARFI of a real estate company may be considered as a capital gain on shares (not on real estate) and enjoy a full tax exemption provided in the participation exemption regime. For Instance, currently capital gains realised by a SOPARFI on shares held in a Société Civile Immobilière (SCI) in France are not taxable, either in France or in Luxembourg. Many other double taxation treaties do not tax the capital gain (or dividends) received by a SOPARFI on real estate SPVs.

Click here to see the full list of double tax treaties agreed between Luxembourg and other countries

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