FOCUS ON THE DOUBLE TAX TREATY (“DTT”) BETWEEN LUXEMBOURG AND THE UNITED ARAB EMIRATES
December 2009
Luxembourg currently has more than 50 double tax treaties in force and about 20 in the course of negotiation or ratification. An interesting addition to this is the recently ratified double tax treaty between the United Arab Emirates (UAE) and Luxembourg (the “DTT”) which aims to enhance economic cooperation between both countries.
The provisions of the DTT largely follow the OECD Model Convention of 2005 although there are some interesting exceptions.
1) Residence
The notion of residence is consistent with the definition given in the OECD Model Convention 2008 except for the definition of the governmental institutions in UAE which includes UAE sovereign funds.
2) Withholding Taxes
The UAE does not levy any withholding tax on dividends, royalties or interest.
Luxembourg does not levy withholding tax on interests or royalties. Further, Luxembourg does not levy its domestic 15% withholding tax on dividends as long as the following conditions are fulfilled:
-
the parent company has owned, at the time of the distribution, a direct shareholding of 10% at least in the share capital of the company distributing the dividends, over an uninterrupted period of twelve months at least or commits itself to keep such shareholding until a twelve months period has lapsed. An alternative to the 10% threshold is an acquisition price of the participation, of EUR 1,200,000.
-
the parent company is resident in a country with which Luxembourg has concluded a double tax treaty and is liable to “comparable” corporate income tax.
Should these conditions not be fulfilled, then the DTT reduces the rate of withholding tax on dividends paid by a Luxembourg entity to a UAE entity as follows:
3) Capital Gains
Taxation of capital gains is consistent with most of the double tax treaties signed by Luxembourg.
- Capital gains on real estate property are taxable in the jurisdiction where the real estate is located.
- Capital gains on movable property forming part of the business property of a permanent establishment which an enterprise of a contracting state has in a jurisdiction are taxable in this jurisdiction.
- Capital gains realized on the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, will be taxable in the jurisdiction in which the place of effective management of the enterprise is located.
- Capital gains upon disposal of any property, other than that mentioned above, shall be taxable only in the jurisdiction of the alienator’s residence.
4) Exchange of Information
The DTT has a clause dealing with the exchange of information similar to the one provided for in the OECD Model Convention with the proviso that the exchange of information is limited to taxes mentioned in the DTT. Consequently, it will not extend to SPFs.
5) Enforcement
The Treaty will enter into force pursuant to the exchange of ratification instruments by both States. Its provisions will generally apply as from 1 January of the calendar year following the entry into force of the treaty. However, provisions regarding international traffic will have a retroactive effect to 1 January 2000.
This new treaty strengthens the position of Luxembourg as the hub of investments in Europe. Combined with the recent local developments in the field of Islamic Finance, it should doubtless improve business relationships between Luxembourg and the Gulf Area.
[top]
|
