Key Changes to the UK - Luxembourg Double Tax Treaty

Since its establishment in 1967, the Double Tax Treaty (DTT) between the United Kingdom and Luxembourg has seen a number of amendments and revisions. On the 7th of June 2022, a new set of amendments were concluded, and are set to be enforced in January 2024. The corresponding law no. 8160 has been approved by the Luxembourg Parliament on 19th July 2023.

Driving the amending DTT are the UK’s withdrawal of the European Union (Brexit) and the evolution of tax standards put forward by the OECD’s BEPS project in recent years.

The new treaty will have significant implications for UK real estate investors with Luxembourg holding structures, as it will allow UK taxation on certain indirect disposals of UK land.

Several amendments have been made to the existing clauses within the treaty in order to adhere to the standards set out by the BEPS project and maintain a favourable economic environment between Luxembourg and the UK.

The first being the introduction of the ‘Property-Rich Clause’ which governs the treatment of capital gains from the sale of shareholdings (or comparable interests), deriving more than 50% of their value directly or indirectly from immovable property. Any persons who fall within scope of this clause may now be subject to taxation in the state where the immovable property is located.

The treaty provides that dividend distributions from a  resident in one contracting state, to a beneficial owner resident in the other contracting state, shall not be subject to withholding tax in the source state, although some exemptions may still apply. The current treaty provides for a 5% withholding tax at source subject to specific conditions.

The exemptions under the new treaty do not apply when dividends, are paid out of income derived either directly, or indirectly from immovable property, by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax. In such case, the dividends would be subject to a 15% withholding tax. However, when the investment vehicle distributes the dividend to a recognised pension fund which is considered to be the beneficial owner, the exemption will be applicable.

In contrast to the current treaty which permits the source state to levy a 5% withholding tax on royalty payments, (although Luxembourg does not impose WHT on royalties under domestic law),  under the new treaty, the source state of residence of the beneficial owner has the exclusive right to tax royalty payments.

More positively, other changes may have an effect on specific fund structures and potentially improve the ability of fund investors to obtain treaty protection. The new treaty removes the obligation for fund investors to file individual claims for relief from withholding tax on interest and dividends. Such claims can be made by an authorised representative of the fund directly.

In addition to this, the benefits of the new treaty will be extended to certain Luxembourg fund vehicles that hold a corporate form, such as a SICAV (société d'investissement à capital variable), SIF (special investment fund) or corporate RAIF (reserved alternative investment funds), where previously these vehicles were not afforded treaty access.

If you would like to learn more about the Double Tax Treaty between the United Kingdom and Luxembourg, reach out to Arek Kwapien.