Germany: New Germany - Luxembourg Tax Treaty

Last Updated: 29 May 2012
Article by Dr. Andreas Rodin and Dr. Peter Bujotzek

Most Read Contributor in Germany, November 2017

On 23 April 2012 the Federal Republic of Germany and the Grand Duchy of Luxembourg signed a new Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital ("Treaty"). The new Treaty is based on the OECD Model Tax Convention and follows the current German policies on double taxation treaties, e.g. regarding the exchange of information between the fiscal authorities of both contracting states. It is amended by a protocol ("Protocol") that constitutes an integral part of the Treaty.

The new Treaty results in an extensive revision of the currently applicable double taxation treaty dated 1958 ("1958 Treaty"). The new provisions affect, among others, the taxation of funds. Some of the new provisions specifically relate to certain types of funds, e.g.

  • the explicit provisions regarding the entitlement of regulated funds to Treaty benefits.

Other amendments typically affect the taxation of funds, in particular German inbound investment structures used by Luxembourg private equity funds. We would like to draw your attention to the following:

  • change of the withholding tax rate with respect to dividends;
  • increase in taxation of payments on certain hybrid financing instruments;
  • establishment of right to tax with respect to capital gains from the disposition of shares in real estate companies.

I. Entry into Force

The new Treaty will enter into force on 1 January of the year following the completion of the ratification process, i.e. presumably on 1 January 2013. The Treaty will replace the 1958 Treaty which is currently in force.

II. Treaty Benefits for Regulated Funds

The Protocol explicitly states that regulated funds will be entitled to claim Treaty benefits regarding the reduced withholding tax rates applicable to dividends and interest. In this context, the Protocol differentiates between investment companies and investment funds (Investmentvermögen); unlike the nomenclature of the German Investment Act ("GIA"), the term "investment funds" (Investmentvermögen) relates exclusively to funds of contractual type.

1. Investment Companies

Investment companies are entitled to claim a reduction of withholding taxes on dividends and interest payments in their own name (no. 1 para. 2 Protocol). The following entities qualify as investment companies: German Investment Stock Corporation and Luxembourg venture capital investment company (société d'investissement en capital à risque; SICAR), investment company with variable capital (société d'investissement à capital variable; SICAV) and investment company with fixed capital (société d'investissement à capital fixe; SICAF).

The explicit confirmation of the entitlement of investment companies to Treaty benefits is to be welcomed. Such entitlement has been largely recognized under the 1958 Treaty and has been allegedly confirmed in correspondence exchanged between the German and Luxembourg fiscal authorities. However, based on the personal tax exemptions of SICAVs and SICAFs, occasionally the question was raised whether those investment companies were resident in Luxembourg for treaty law purposes.

Luxembourg investment companies are defined exclusively by reference to the regulatory regime; a body corporate is not explicitly required. Nonetheless, under the general rules on the application of double tax treaties to partnerships SICAFs and SICARs organized as partnerships (e.g. a société à responsabilité limitée; SCS) are likely not to be deemed entitled to Treaty benefits.

2. Funds of Contractual Type

Funds of contractual type (i.e. asset pools (Sondervermögen) organized under the GIA and Luxembourg fonds commun de placement; FCP) are entitled to claim Treaty benefits regarding the reduced tax rates applicable to dividends and interest (only) to the extent that their unit holders are resident in the same state as the fund. As a consequence of the fund's eligibility for Treaty benefits the investor's right to a corresponding reduction of source taxation ceases to exist (no. 1 para. 1 Protocol).

The partial entitlement of asset pools (Sondervermögen) and FCPs to Treaty benefits is primarily of procedural importance. Funds of contractual type will be entitled to claim in their own name Treaty benefits available to their investors residing in the same contracting state. However, in particular with respect to mutual funds there is no rule how to determine in which state the fund's investors are resident. The tax treaty between Germany and the U.S. of 2006 contains a similar provision. The German-U.S. treaty provides that the authorities of the contracting state shall establish procedures to determine the residency of their investors (including statistically valid sampling techniques), but such procedures have not yet been implemented.

The provision regarding the entitlement of German funds to Treaty benefits is too narrow insofar as no. 1 para. 1 lit. a) of the Protocol relates only to asset pools (Sondervermögen) managed by a "Kapitalanlagegesellschaft", i.e. a German investment management company (§ 2 para. 6 GIA). To the extent German investors are invested in a Sondervermögen organized under German law, the Treaty benefits regarding the withholding tax deduction should be also available in the case the Sondervermögen is managed by a EU management company, regardless of whether such management company is resident in Luxembourg or another EU member state (cf. § 1 para. 1a German Investment Tax Act).

3. Impact on the German Domestic Law

For purposes of defining the terms investment company and investment fund (Investmentvermögen) within the meaning of the Treaty it is irrelevant whether a Luxembourg investment company or a FCP qualifies as a "foreign investment fund" under GIA. In particular, private equity funds organized as Luxembourg investment companies do not qualify as "foreign investment funds" within the meaning of GIA. Moreover, under German domestic law it is uncertain how to qualify a Luxembourg FCP for German tax purposes. Unfortunately there is no clarification regarding this issue in the Treaty.

III. Dividends

1. General

Generally, the withholding tax on dividends remains unchanged at a rate of 15%. However, under the new Treaty each contracting state is explicitly entitled to enforce the anti-avoidance provisions of its domestic law. In particular, this relates to the domestic anti-treaty shopping provision of § 50d para. 3 of the German Income Tax Act ("GITA"). Under this provision foreign companies without sufficient substance are not entitled to treaty benefits with respect to German source "passive" capital income. As a consequence, German source tax would be levied at the statutory withholding rate of 25% plus solidarity charge.

2. Intercompany Dividends

Under the new Treaty, the maximum withholding rate on intercompany dividends is reduced from 10% to 5%. Moreover, the minimum participation required for the intercompany benefits has been lowered from 25% to 10%.

The Treaty provisions regarding intercompany dividends are likely to become relevant where the requirements of the parent subsidiary directive (e.g. the minimum holding period of one year) are not met. While the application of the parent subsidiary directive requires the same minimum participation as the Treaty, under the parent subsidiary directive the withholding tax is reduced to zero (i.e. no tax is levied by way of withholding).

3. Investment Companies and Partnerships as Beneficial Owners

The Treaty limits the withholding tax rate to 15% in case the beneficial owner of the dividend is an investment company (i.e. German Investment Stock Corporation or Luxembourg SICAR, SICAV or SICAF), a partnership or an individual; the additional reduction applicable to intercompany dividends is not available.

Furthermore, if a Luxembourg investment company qualifies as a "foreign investment fund" within the meaning of GIA the application of the domestic anti-treaty shopping provision of § 50d para. 3 GITA is excluded. It should be noted, however, that private equity funds do not qualify as such foreign investment funds.

4. Real Estate Companies as Distributing Companies

The withholding tax rate is limited to 15% with respect to dividends paid by any real estate investment company which is tax-exempt regarding all or parts of its profits or which can deduct the distributions in determining its profits. Real estate investment companies are, among others, German REIT Stock Corporations.

It is, however, still unclear which other types of companies may qualify as real estate investment companies.

IV. Hybrid Debt Instruments

The Treaty provides for an increase in taxation of payments on hybrid debt instruments issued by German debtors. No. 2 para. 1 of the Protocol reserves the right to tax German source income derived from payments in consideration for profit sharing rights or debt claims (including silent partnerships or profit participating loans) to Germany, provided that those payments are deductible in determining the profits of the debtor. Unlike most German tax treaties such income is not treated as dividend income for Treaty purposes. Hence, such income may be subject to the statutory withholding rate of up to 25% plus solidarity surcharge.

The aforementioned financing instruments are often employed by foreign (e.g. Luxembourg) private equity or real estate funds for their German acquisition structures. Accordingly, it is advisable to critically reconsider repatriation strategies that were employed in the past.

V. Capital Gains; Real Estate Companies

Private equity funds, including real estate private equity funds, typically generate a major portion of their profits from capital gains realized upon the sale or other disposition of equity shareholdings in their portfolio companies.

Germany's right to levy German tax on capital gains realized by a Luxembourg fund upon the disposition of an equity shareholding in a portfolio company with its seat or place of management in Germany has been waived under both, the new Treaty as well as the 1958 Treaty (unless such shareholding is attributable to a German permanent establishment of the fund). Up to now, such waiver has equally applied with respect to dispositions of shares in portfolio companies holding German real estate.

Pursuant to the new Treaty capital gains derived by a resident of a contracting state from the disposition of shares deriving more than 50% of their value directly or indirectly from real estate situated in the other contracting state may be taxed in that other state. The new provision may particularly impact indirect investments in real estate located in Germany.

The new provision is based on the OECD Model Convention. According to the official commentary of the OECD Model Convention, the determination of the company's real estate assets will be done by comparing the value of the real estate situated in a contracting state to the value of all the assets held by the company without taking into account debts or other liabilities of the company; debts and liabilities are likely to be disregarded even if the underlying debt instrument is secured by real estate. Furthermore, the purpose of the company is supposedly irrelevant, i.e. the term "real estate company" includes companies that use the real estate assets from which the shares derive their value to carry on a business (e.g. a hotel).

Under the new Treaty, Germany would have a right to tax also capital gains realized by a shareholder resident in Luxembourg upon the disposition of shares in a Luxembourg real estate company holding German real estate. However, under its domestic law Germany has not exercised its right to tax such capital gains and, as a consequence, no German taxes will be levied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions