In July 2022, it was announced that Luxembourg and the United Kingdom had come to an agreement on certain amendments to their double taxation treaty. It was expected that these would take effect from 1 January 2023, being the first tax year following an anticipated ratification by each of the two countries. While the UK ratified the amendments in October 2022, this has not so far been the case for Luxembourg. It can be expected that Luxembourg ratification will occur in the course of 2023, thus implementation of the new provisions should be as of 1 January 2024 for Luxembourg tax purposes and 6 April 2024 for UK tax purposes.
By way of reminder, the principal amendment relates to the taxation of capital gains realised on the sale by Luxembourg resident investors of shares (or comparable interests) in companies owning UK real estate. Currently the treaty effectively provides an exemption as it allocates taxation rights exclusively to Luxembourg whose participation exemption rules mean that it will not exercise those taxation rights. The change will have the effect of allowing the gains to be taxed in the UK who will tax if the UK real estate represents 75 per cent more of the value of the shares.
Other changes include a reduction in the rate of withholding tax on dividends paid by a company resident in one country to a company resident in the other (provided the recipient company is the beneficial owner of the dividend). Previously the rate was five per cent and reliance was placed on the EU Parent/Subsidiary Directive for an exemption. Save in limited circumstances involving income derived from real estate, the withholding tax rate is now zero under the revised treaty.
This will also mean a delay in the changes affecting collective investment vehicles that are set up as corporate entities for tax purposes in Luxembourg and receive income arising in the UK. The change is in broad terms to the effect that will be treated as resident of Luxembourg and beneficial owner of such income for purposes of applying the provisions of the treaty to the extent that the beneficial interests in the CIV are owned by Luxembourg residents or residents of countries which have a treaty with the UK. Where 75 per cent of the beneficial interests in the CIV are held by such persons, or the CIV is a UCITS, then it will be treated as a Luxembourg resident in respect of all the income it receives.
Finally, the anti-abuse provision known as the principal purpose test, introduced by the OECD Multilateral Instrument, will therefore also not take effect yet. However, any investment structures would be wise to take that test into account given the increasing attention being paid by tax authorities to what is considered to be aggressive tax planning.