Luxembourg Treaty Provisions

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.

See the table in the following section as regards the countries covered by Double Tax Treaties and the applicable rates of withholding tax.

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 have 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."

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.

Luxembourg Table of Countries and Rates of Dividend Withholding Tax

Notes:

(a) The treaty which was agreed with Czechoslovakia continues to apply in both the Czech Republic and Slovakia.

(b) The lower rate of 5% applies when the recipient owns at least 10% of the paying company.

(c) The 10% rate applies when the recipient holds at least 30% of the paying company, or the value of its investment in the paying company amounts to at least 75,000 euros.

(d) A zero rate applies when the receiving company has owned at least 25% of the paying company for 2 years or more.

(e) The US 1962 double tax treaty was superseded by the 1996 treaty at the end of the year 2000 (but see above).

(f) A 5% rate applies when the receiving company holds at least 50% of the paying company or has invested at least $10 m in the paying company.

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 is 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.