New Luxembourg-Germany Double Tax Treaty

Luxembourg and Germany concluded on 23rd of April 2012 a new Double Tax Treaty replacing the former treaty signed in 1958. The new treaty follows mainly the OECD Model convention on income and capital but it contains a number of new anti-abuse provisions to tackle situations where double non taxation may arise.

Here below are the salient changes of the provisions of the treaty:

Under the new treaty, the reduced withholding tax for dividends is lowered to 5% when the parent company holds 10% of the share capital of the paying subsidiary. The standard rate of 15% for portfolio and partnership dividends remains unchanged. For interests, the treaty provides for a 0% withholding rate whereas royalties are subject to a reduced withholding tax of 5 %. The treaty attributes the taxing rights to the source State for capital gains on disposal of shares of Real Estate companies deriving more than 50 % of their value directly or indirectly from immovable property situated therein. With this provision, the sale of shares of a German real estate company through Luxembourg companies becomes taxable in Germany. Hybrid instruments and entities are covered by the protocol to the new treaty which attributes the taxing rights to Germany in respect of income from profit participating loans or bonds, and income from silent partnerships where the said income have been deducted from the profits of the issuer. For Luxembourg tax purpose, the treaty reclassifies the aforementioned income from debt instruments or silent partnerships as dividends. Investment funds such as SICAV, SICAF or SICAR are expressly entitled to treaty benefits, namely they can take advantage from the reduced withholding tax rate for interest and dividends. Contractual investment...