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New UK - Luxembourg Double Tax Treaty

Insight 19 July 2022

New UK - Luxembourg Double Tax Treaty

On 7 June 2022, Luxembourg and the UK signed a new Double Tax Treaty together with a Protocol, introducing a set of updated tax provisions governing business relations between both countries going forward.

The updated provisions, which are partially inspired from the latest version of the OECD Model Convention might already come into force in 2023, as further detailed below, and would replace the current treaty dated 1967, as amended from time to time

Below, we have summarised some of the key changes which should be reviewed and assessed, starting today, as to understand potential tax implications on investment structures relying on the provisions of the current treaty.

Article 4 – Resident

The changes with respect to article 4 are two-fold:

  • with respect to the residency of persons (other than individuals), the current effective place of management tiebreaker rule will be replaced by a mutual agreement between competent authorities
  • with respect to persons eligible to the provisions of the treaty, the current definition will be expanded as to include recognised pension funds and charitable organisations of both countries
  • also, Luxembourg collective investment vehicles such as UCITS, UCIs, SIFs and RAIFs will be considered residents under the new provisions, subject to specific conditions being met.

Article 10 – Dividends

Going forward, dividends paid under the new treaty will be exempt from withholding tax, as opposed to a 5% / 15% withholding tax under the current provisions.

From a Luxembourg tax perspective, withholding tax exemption on dividend was regularly achieved through the application of the domestic participation exemption regime, which is no longer applicable to UK residents, further to their exit from the EU.

However, the newly introduced withholding tax exemption shall not apply to dividend distributions made by REITs or similar vehicles.

Article 12 – Royalties

Going forward, royalties paid under the new treaty will also be exempt from withholding tax, as opposed to a 5% withholding tax, under the current provisions.

This exemption is less relevant from a Luxembourg perspective given the absence of domestic withholding tax on royalties but should be more attractive for royalty payments coming from the UK.

Article 13 – Capital Gains

The change operated in article 13 is of particular significance for cross-border real estate investments as it introduces a new property-rich clause with respect to share deals.

Under the provisions of the new treaty, capital gains derived upon disposal of shares (or comparable interests in partnerships or trusts) of a property-rich resident shall be taxable in the country where the invested immovable property is located.

For illustration purposes, the disposal by a Lux HoldCo of a Lux PropCo invested exclusively in UK real estate, will be subject to tax in the UK and not in Luxembourg.

A resident is considered as property rich, where more than 50% of its value is derived directly or indirectly from immovable property.

In this context, it seems relevant to highlight that these new provisions differ from the existing UK regime of non-resident capital gains tax (NRCGT) which foresees a 75% threshold of value derived from UK real estate.

Article 28 – entitlement to benefits

Article 28 incorporates, in line with the Multilateral Instrument (MLI), the so-called Principle Purpose Test (PPT) which needs to be met to grant the benefits of the new treaty. These provisions aim at eliminating treaty shopping situations by denying treaty benefits to transactions/arrangements not meeting the conditions of the PPT.

In this context, it seems relevant to highlight that these new provisions should not prevent Luxembourg from applying its own Controlled Foreign Company (CFC) rules.

Assuming the new treaty will be ratified in 2022, below are the dates of entry into force for each tax category for both countries.

UK

Withholding tax

1 January 2023

Corporation tax

1 April 2023

Income and capital gains tax

6 April 2023

Luxembourg

Withholding tax

1 January 2023

Other taxes

1 January 2023

Sanne’s team of experts spans a global office network and has a proven track record in assisting clients and entities administered through new compliance requirements. Our service offering is orientated around the provision of a full suite of asset class specialist fund and corporate administration services, including expertise across listed and regulated fund structures, loan agency and capital market specialisms.

Written by Sanne's Paul Sejournant and Valentina Pavlova.

Please reach out to Paul and Valentina directly to find out how Sanne can assist you or your business.

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Paul Séjournant Director, Product Development - United Kingdom
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