UK and International Tax news
New UK Luxembourg Double Tax Treaty
Tuesday 12th July 2022
A new UK Luxembourg double tax treaty was signed on 7 June 2022 and this contains some notable changes compared to the existing treaty.
Of most significance is the change to Article 13 (capital gains) which will affect property investors with the introduction of a rule which allows the UK to tax Luxembourg residents on gains arising on indirect disposals of UK property, and vice versa for indirect disposals by UK residents of Luxembourg property.
Under the current treaty, the UK has no taxing rights over gains from the sale of indirect investments in UK property, including those which derive the majority of their value from UK land and which would, but for the treaty, be taxable under the UK’s non-resident CGT rules introduced in 2019.
Under the new treaty, the UK will now be able to tax Luxembourg residents on the sale of shares or comparable interests (including interests in a partnership or trust), if those shares or interests derive more than 50% of their value, directly or indirectly, from UK land, and vice versa.
However, this change will not mean that sales by Luxembourg residents of all shares (or comparable interests) that derive over 50% of their value from UK land will, be taxed in the UK. Disposals of interests in tax opaque property owning entities are currently only within the scope of the UK’s domestic non-resident CGT rules where the relevant interest exceeds 75% of its value from UK land.
A new Article 10 (dividends) should permit UK residents to claim a 0% withholding tax rate on dividends from Luxembourg, whereas currently the treaty provides for a 15% withholding tax rate on dividends in general, reducing to 5% where the recipient has at least 25% of the voting power in the payor company.
New Articles 11 (interest) and 12 (royalties) will provide for 0% withholding tax rates to apply to payments of interest and royalties, whereas the current treaty permits the source state to levy withholding taxes at 5%.
The availability under the treaty of full relief from withholding tax for interest, royalties and most dividends will put UK residents in a similar position as they would have been in had they continued to have access to the EU’s Interest and Royalties and Parent-Subsidiary directives.
Subject to ratification, and assuming the UK and Luxembourg governments each notify the other that they have ratified the treaty by the end of 2022, the changes to withholding tax will come into force from 1 January 2023, and the changes to the UK taxation of indirect disposals will come into force from 6 April 2023 (for capital gains tax payers) or (ii) for financial years beginning on or after 1 April 2023 (for corporation tax payers).
If you would like more information on the new treaty, please contact Keith Rushen on 0207 486 2378.
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