Protocol between Luxembourg and Spain amending the double tax treaty

On the sidelines of the European Council of Finance Ministers (Ecofin) meeting, an amendment to the existing bilateral double taxation agreement in place between Luxembourg and Spain has been executed by the Luxembourg Minister of Finance and its Spanish opposite on 10 November 2009.
In accordance with the OECD standard, the protocol provides for an exchange of information in specific cases between the respective tax authorities.
Such protocol is very important for the development of the international activities of Luxembourg's financial center, and notably its investment fund sector:  Luxembourg will no longer be considered as a tax haven according to the royal Spanish decree which define tax havens.

Luxembourg - Hong Kong double tax treaty entered into force

The Luxembourg - Hong Kong double tax treaty has entered into force on 20 January 2009 following the exchange of the ratification documents.
We set out hereunder the main features of this treaty. The maximum withholding taxes that will be applicable are as follows:

  • 0% on dividends if the beneficial owner is a company that directly holds at least 10% in the capital of the distributing company or the participation has an acquisition cost of at least 1,200,000 Euro;
  • 10% on dividends in all other cases;
  • 0% on interests; and
  • 3% on royalties paid from Hong Kong to Luxembourg. According to Luxembourg internal law, royalties other than royalties for the use of, or the right to use, any copyright of literacy or artistic work are not subject to withholding tax.

Capital gains realised on the sale of assets are taxed in the place where the seller is resident, except if the sold asset qualifies as:
- immovable property situated in the other contracting party;
- movable property allocated to a permanent establishment in the other contracting party;
- shares of a company more than 50% of the value of which is derived directly or indirectly from immovable property situated in the other contracting party;
In other words, a sale of shares held by a Luxembourg parent company in a Hong Kong subsidiary will be only taxable in Luxembourg. In accordance with Luxembourg internal law, such capital gains will be exempted from capital gains tax if the Luxembourg company owns more than 10% of the capital in the Hong Kong subsidiary and the disposal takes place within 6 months of the acquisition of the shareholding.
Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Chinese and Hong Kong investors may be able to use this tax treaty as a platform for their European investments.

Tax reforms proposed by the Luxembourg government

In a speech addressed to the Luxembourg Parliament on May 22, 2008, Jean-Claude Juncker, the Luxembourg Prime Minister,  shed lights on Luxembourg’s economic, social, and financial situation and proposed important changes, mainly from a taxation perspective.
Brief overview of the main changes proposed:

  • Relating to corporate taxation
    • Progressive decrease of the corporate tax rate from 29.63% to 25.5% with a possible broadening of the corporate tax base
    • Abolishment of capital duty as from January 1st , 2009
  • Relating to personal taxation
    • Income tax brackets for personal income tax will be increased by 6% in 2009
    • Increase of tax deduction ceilings (insurance premiums)
    • Tax allowance of € 600 for salaried and pensioned taxpayers will be replaced by a tax credit of € 300
    • Single parent allowance of € 1,920 will be replaced by a tax credit
    • Salary indexation will be restored as from 2010 (unless the economic situation worsens)
    • Introduction of specific measures for people with low income
  • Relating to Philanthropy  and Environment
    • The maximum tax deductible amounts for donations to certain charitable organization are doubled from € 500,000 to € 1,000,000, respectively from 10% to 20% of the net income
    • No increase of the duty on road fuel (petrol and diesel) and of excise duties
    • Company cars will benefit from the € 750 incentive granted for the purchase of low-emission cars (< 120g CO2/km)

While promoting environmental and philanthropic measures, those proposed reforms mainly aim at enhancing Luxembourg attractiveness for investors, in the context of a general slowdown of the global economic activity, which justify the introduction of social measures.
On the whole, it is a balanced evolution allowing for a preservation of Luxembourg competitiveness in a new economic context.

Proposal for a future decrease and abolition of Luxembourg capital duty

A Luxembourg bill on the Luxembourg 2008 Budget was introduced on 10 October 2007. The Luxembourg government has decided to gradually phase out the current capital duty of 1%. The proposal foresees a reduction from 1% to 0.5% starting on 1 January 2008 and a complete abolition by 2010 at the latest.