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 funds such as FCP are also entitled to
treaty benefits provided that they are held by persons resident in
the country where the FCP is established.
The treaty expressly provides that both states may rely on
their domestic anti-abuse provisions. Germany for instance grants
the exemption to mitigate double taxation only where the underlying
income in the source state is derived from "active business
income" defined under the German tax law. In practice the
exemption is granted if the income is subject to tax in Luxembourg.
If the exemption is not granted, Germany will apply the credit
method.
The new treaty will enter into force as of January 1st of the
year following the ratification in both countries. The treaty shall
probably apply to taxes due after January 2013.
Conclusion
The treaty introduces some clarity namely in the field of
investment funds by allowing their access to treaty benefits in
accordance with the OECD principles. However the treaty impacts the
current German Real Estate structures held through Luxembourg
companies. Investors should restructure their holdings or realize
capital gains on the German companies prior to the entry into force
of the new treaty. Lastly the reliance on domestic anti-abuse law
subject to the requirements of EU law, highlight the growing
importance of the substance of companies in Luxembourg.
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.
Specific Questions relating to this article should be addressed directly to the author.
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