Corporate Tax 2013

Luxembourg

1 Tax Treaties and Residence

1.1 How many income tax treaties are currently in force in Luxembourg?

Luxembourg has agreed to 77 income tax treaties. Currently, 64 of these income tax treaties are in force. In total, 37 treaties apply to Luxembourg corporate undertakings of collective investment (SICAV/SICAF) (see also question 1.4 for South Korea).

1.2 Do they generally follow the OECD or another model?

Almost all income tax treaties entered into by Luxembourg follow the OECD Model Convention on Income and Capital, except the income tax treaties with Germany and France that had come into force before the first OECD Model Convention (and despite further renegotiations with both treaty partners). Deviations from the OECD model treaty often relate to a few particulars, but seldom to the entire treaty, e.g. the taxation of capital gains under the income tax treaty with South Korea or more typically the limitation-onbenefits provisions in certain treaties such as the Luxembourg-US income tax treaty and the forthcoming protocol to the Luxembourg – Poland tax treaty (see question 1.4). 24 income tax treaties agreed by Luxembourg contain a provision compliant with article 26, paragraph 5 of the OECD model, relating to the exchange of information upon request in matters that previously had been covered by banking secrecy. Luxembourg is not grey or blacklisted by the OECD in this respect. Similarly, some tax treaties include some of the provisions proposed by the UN Model Convention.

1.3 Do treaties have to be incorporated into domestic law before they take effect?

Tax treaties are to be incorporated into domestic law. The following procedure applies: the legislator gives its consent by adopting a consenting law (loi d'adaptation) that authorises the Grand Duke to ratify the tax treaty. The tax treaty enters into force once the ratification instruments have been exchanged and after publication of such ratification in the official gazette, following which the tax treaty is incorporated into domestic law. Typically, a tax treaty contains specific language as to its entry into force, which thus, given the above ratification and publication process, may be retroactive. Such retroactivity is valid when provided for by the consenting law and provided that it improves the position of the tax payer ("in meius").

1.4 Do they generally incorporate anti-treaty shopping rules (or "limitation on benefits" articles)?

The income tax treaties concluded by Luxembourg do not systematically contain anti-treaty shopping rules, except for the limitation-on-benefits provisions contained in the tax treaties concluded with the USA, Hong Kong, Singapore, Trinidad and Tobago and Poland.

Also, more recently negotiated treaties make broader reference to the concept of "beneficial ownership" and in the context of dividend distributions that the distributing company must not only be "a Company of the other Contracting State", but "a Company who is a tax resident of the other Contracting State", which depending on the context, may be considered as a more restrictive language.

A large number of treaties concluded by Luxembourg include specific limitation on benefits provisions that deny treaty protection to companies subject to the Law of July 31, 1929 or any similar law enacted by Luxembourg, such as e.g. the Private Wealth Investments Companies (Societe de Gestion de Patrimoine Familial "SPF"). Now that companies subject to the Law of July 31, 1929 no longer exist, the question of how such limitation on benefits clause must be interpreted, as well as what should be considered as a "similar law". In this context, a recent dispute has arisen as to the interpretation of this provision under the double tax treaty between Luxembourg and South Korea and whether, contrary to past practice, South Korea would be entitled to exclude Luxembourg SICAV from the benefits of this treaty under the limitation on benefits clause by arguing that the Luxembourg legislation on investment funds should be considered as such "similar law(s)".

The forthcoming protocol to the Luxembourg – Poland tax treaty refuses treaty protection in case of income connected to artificial arrangements and to persons taking advantage of measures qualified as a harmful tax measure by the EU Code of Conduct for business taxation.

1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)?

Under the general principle of Luxembourg public law, (tax) treaties are to be considered a "lex specialis", prevailing over domestic law. Thus, once a tax treaty is applicable and a conflict between domestic law and treaty law arises, the tax treaty provisions will apply.

1.6 What is the test in domestic law for determining corporate residence?

Undertakings with a collective character whose registered office or central administration is located in Luxembourg are considered Luxembourg tax resident companies and are therefore liable to Luxembourg corporation taxes on their worldwide profits, unless a tax treaty provides otherwise.

2 Transaction Taxes

2.1 Are there any documentary taxes in Luxembourg?

Ad valorem registration duties are levied on a number of transactions in Luxembourg, which either must be registered (e.g. notary deeds and documents used in the framework of judicial proceedings in front of a court must be registered by law) or are voluntarily registered.

An ad valorem 6% registration duty, assessed on the highest of the purchase price or the fair market value, is levied on the transfer of land and buildings, even if such a transfer is not embodied in a written document. The registration duties may be increased by municipal transfer taxes. In addition, a transcription tax of 1% applies. As an example, transfers of land and buildings, other than residential property, located in the city of Luxembourg, are subject to 10% tax. Transfers of shares in Luxembourg tax-transparent entities holding Luxembourg situs real estate trigger tax in the same proportion as if the Luxembourg real estate was owned and sold directly by the investors in the transparent entity.

A 0.24% registration duty, assessed on the amount of the claim, is due on the registration of an obligation to pay, evidenced by a document in writing, provided that the obligation to pay is not embodied in a security and provided that the obligation to pay does not represent the price of a transfer of movable or immovable goods which would not have been registered. The registration of such a document is therefore relatively exceptional, except if the claim is secured by a mortgage on Luxembourg real estate.

A 0.6% registration duty, assessed on the total amount of the lease payments, is due on the registration of lease agreements embodied in a written document. However, if the lease agreement is subject to VAT, no ad valorem registration duties will be due on the registration of the lease agreement.

All transactions relating to a securitisation operation involving a Luxembourg securitisation vehicle incorporated under the Law of March 22, 2004 are exempt from registration, except if the transaction involves a transfer of rights on land and buildings located in Luxembourg or on planes and boats registered in Luxembourg.

Mortgages are subject to a special mortgage tax at 0.05% of the value of the property.

2.2 Do you have Value Added Tax...

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