The Luxembourg tax authorities released Circular L.G. – Conv. D.I. n°58 on February 9th 2015 (hereafter the "Circular") which aims at providing clarification with regards to the interpretation of the term Investmentvermögen used in the new double tax treaty signed between Luxembourg and Germany and effective since January 1st 2014 (hereafter the "DTT").
Article 1 §1 of the protocol to the DTT states that Investmentvermögen set up in accordance with the law of one of the contracting States (in Luxembourg an Investmentvermögen is a fonds commun de placement, commonly referred to as an FCP, i.e. an investment fund without a corporate form that is represented and managed by a management company) can request the benefits of the articles 10 (related to dividend distributions) and 11 (related to interest payments) provided that they are held by residents (as defined in article 3.d. of the DTT) of the same contracting State. In case the Investmentvermögen avails itself of the reduced treaty rates as regards dividends and interest payments, the investors lose their right to claim these treaty benefits.
Prior to the issuance of the Circular, there was some uncertainty as to whether Article 1 §1 created a special entitlement of the tax transparent Investmentvermögen itself to the benefits of the DTT and especially to the reduced withholding tax rate on dividend payments (irrespective of the actual percentage of ownership of each investor) or whether this confirmation is solely of a procedural nature, i.e. related to whom in practice requests the application of the DTT (as opposed to being entitled to its benefits).
The Investmentvermögen is allowed to request the application of the benefits of the DTT on behalf of its investors.
As a result, the Luxembourg tax authorities clarified that the protocol to the DTT solely confirms that the Investmentvermögen is allowed to request the application of the benefits of the DTT on behalf of its investors (instead of each investor requesting it separately). As such, the reduced withholding tax rate of 5 % on dividend distributions is only applicable for investors in the Investmentvermögen that fulfil the condition of article 10, i.e. corporate investor holding at least 10% of the share capital of the distributing company (through the tax transparent Investmentvermögen.)
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