Luxembourg has announced a new regime that offers a special tax incentive for certain income from intellectual property rights. On 7 August 2017, a bill of law proposing the introduction of a new Luxembourg intellectual property (IP) tax regime was published.
The bill was submitted to the Chamber of Deputies on August 4, 2017, and is designed to be aligned with the “modified nexus” approach to special IP tax regimes agreed by countries under Action 5 of the OECD’s base erosion and profit shifting project. Under the proposal, up to 80% of the net income and capital gains derived from specific protected IP assets would be exempt from corporate income tax and municipal business tax, and these eligible IP assets would be fully exempt from net wealth tax. IP assets with a marketing nature (e.g. trademarks, domain names, designs and models) are excluded from the scope of the proposed regime. The Luxembourg government intends to guide the proposal through Parliament still this year, with an entry into force scheduled for 1 January 2018.
On 7 June 2017 the Luxembourg Finance Minister Pierre Gramegna signed, on behalf of Luxembourg, the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which aims to close loopholes in the current bilateral tax treaties and lessen the opportunity for tax avoidance.
The agreement is designed to prevent the abuse of tax arrangements among participating countries but leaves it up to the respective country whether it wants to apply every article in the treaty. Luxembourg has taken full advantage of this option and added restrictions to 16 of the 39 articles in the instrument. The details of those reservations fill 71 pages.
Once Luxembourg and its co-signatories ratify the Multilateral Convention, Luxembourg’s tax treaties will be amended in several important areas. Under the Convention, Luxembourg and its treaty partners also each commit to improving and speeding up processes for dealing with cross-border tax disputes. In relation to tax disputes Luxembourg has committed to mandatory binding arbitration.
The governments of Cyprus and Luxembourg have signed a convention for the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance. The agreement was signed on 8 May 2017 in Nicosia.
The agreement is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital and incorporates all the minimum standards of the Base Erosion Profit Shifting (BEPS) project, as issued by the OECD /G20 in October 2015, those of BEPS Action 6 (Treaty Abuse) and BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective). Furthermore it includes the exchange of financial and other information in accordance with the relevant Article of the Model Convention.
Under the agreement, there is no withholding tax rate on dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends; otherwise 5%. Interest arising in a contracting state and paid to a resident of the other contracting state shall be taxable only in that other state. Royalties arising in a contracting state and beneficially owned by a resident of the other contracting state shall be taxable only in that other state.
The Ukrainian President signed a law to ratify the income tax treaty with Luxembourg on 3 April 2017.
The Convention between two states was signed as long ago as on 6 September 1997, but has not been ratified until now. On 30 September 2016, parties amended several provisions of the Convention by the Protocol, including articles regarding taxation of dividends, interest and royalties. Luxembourg ratified the amended Convention on 23 December 2016.
The Convention will apply to taxes chargeable and income derived on or after 1 January 2018.
The Competent Authority Agreement on Automatic Exchange of Information (2016) between Singapore and Luxembourg was signed on 10 March 2017. The agreement provides details of what types information will be exchanged and when, in accordance with OECD Automatic Exchange of Information Agreement (2014).
The Double Taxation Agreement (DTA) between Luxembourg and Uruguay entered into force on 11 January 2017. The agreement applies from 1 January 2018. From this date, the new treaty generally replaces the Uruguay-Luxembourg Income and Capital Tax Treaty (1990).
According to the treaty the maximum rate of withholding tax on dividends is 10%. However, if the beneficial owner of the dividends is a company (other than a partnership) and holds a direct holding of at least 10% of the share capital of the company paying the dividends for an uninterrupted period of at least one year, the treaty provides for a 5% rate. Withholding rate of interest is 10%. For royalties, 5% is applicable for the use of industrial, commercial of scientific equipment and 10% is applicable for others.
The treaty generally follows the OECD Model. Luxembourg applies the credit and exemption-with-progression methods for the avoidance of double taxation whereas Uruguay applies the credit method for the avoidance of double taxation.
The Double Taxation Agreement (DTA) between Luxembourg and Brunei is expected to be entered into force on 26 January 2017. The treaty was signed on 14 July 2015. The agreement will be applicable from 1 January 2018 for both countries.
According to the treaty the maximum rate of withholding taxes on dividends, interest, and royalties will be 10%. However, if the beneficial owner of the dividends is a company (other than a partnership) and holds a direct holding of at least 10% of the share capital of the company paying the dividends for an uninterrupted period of at least one year, the treaty provides for a 0% rate.
Luxembourg applies the credit and exemption-with-progression methods for the avoidance of double taxation whereas Brunei applies the credit method for the avoidance of double taxation.