LUXEMBOURG DOUBLE TAX TREATIES

DOUBLE TAX TREATY WITH INDIA

Luxembourg and India signed a double tax treaty on 02 June 2008 to avoid or limit double taxation in Luxembourg and in India. This double tax treaty will enter into force on 1 January 2010.

The main benefits of this treaty are:

Withholding tax on dividends, interest and royalties

The maximum withholding tax applicable to dividend distributions, interest payments and royalty payments is 10%. The rate applicable to dividend distributions applies regardless of the shareholding percentage.

CAPITAL GAINS

Capital gains on sales of shares in companies whose assets mainly comprise immovable property, are taxable in the country in which the immovable properly is located. Capital gains on shares other than the above are also taxable in the source country (country of residence of the company whose shares are sold). This latter provision is not in line with the OECD Model Tax Convention which provides for taxation only in the seller’s country of residence.

ENTITIES EXCLUDED

The tax treaty does not apply to 1929 holding companies and similar tax regimes. Luxembourg SICAV funds are not explicitly excluded but further clarification is needed to ascertain whether the tax regime applicable to SICAV/SICAF and SIF (Specialised Investment Funds) funds is considered as similar to the 1929 holding company tax regime, and therefore whether these entities may benefit from the tax treaty.

AVOIDANCE OF DOUBLE TAXATION

Luxembourg provides for the exemption-with-progression method to avoid double taxation and the credit method with respect to dividends, royalties, and income earned by artists and sportsmen.

LIMITATION ON BENEFITS

The treaty includes a limitation on benefits (“LOB”) clause according to which it will not apply to an entity if the entity’s main objective, or one of its main objectives, is to benefit from provisions of the tax treaty which otherwise would not have applied. Since the wording of this clause is not specific, it leaves considerable room for interpretation and may create legal uncertainty for taxpayers.

DOUBLE TAX TREATY NEWS

To encourage foreign investment, the Grand Duchy of Luxembourg has entered into negotiation for tax treaties with: Argentina; Lebanon; Pakistan; Serbia and Montenegro; and Syria.

Luxembourg has recently signed tax treaties with Albania, Armenia, Azerbaijan, Bahrain, Barbados, Cyprus, Georgia, India, Kazakhstan, Kuwait, Kyrgyzstan, Moldova, Macedonia, Qatar, the United Arab Emirates and Ukraine. These treaties will enter into force as soon as they are ratified by both countries.