July 2014

Double Tax Treaty between Luxembourg
and Taiwan

Tax Alert

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On 12 July 2014 Luxembourg ratified the first Income and Capital Tax Treaty with Taiwan and the Protocol signed on 19 December 2011 (the “Treaty”). Taiwan has already signed the Treaty and the Protocol. Provided that the legal process is finalized within the course of this year, the Treaty will come into force as of 1 January 2015.

The provisions of the Treaty, as foreseen in the Protocol, are also applicable to collective investment vehicles.

The main features of the Treaty are described hereafter.

Permanent establishment

The Treaty definition of permanent establishment includes:

(i) A building site, a construction, a dredging project or assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities lasts more than 6 months

(ii) Service permanent establishments[1]

Dividend

  • The Treaty provides that the withholding tax on dividends will be limited to 10% but 15% if the beneficial owner of the dividends is a collective investment vehicle established in the other territory and treated as a body corporate for tax purposes in that other territory.
  • Taiwan levies 20% withholding tax on dividends paid to non-resident corporations under its domestic law.
  • Under Luxembourg domestic law, dividends distributed by Luxembourg companies to companies in treaty jurisdictions are exempt from withholding tax under certain conditions[2]

Interest

  • The Treaty provides that the withholding tax on interest will be limited to 10% but 15% ifthe beneficial owner of the interest is a collective investment vehicle established in the  other territory and treated as a body corporate for tax purposes in that other territory.
  • The rate will be 0% for interest paid to a State body or a local authority, in respect of a loan granted, guaranteed or insured or a credit extended, guaranteed or insured by an approved instrumentality of the other territory which aims at promoting export, and on loans made between banks.
  • Taiwan levies 15/20% withholding tax on interest paid to non-resident corporations under its domestic law.
  • In principle, Luxembourg does not levy withholding tax on interest under its domestic law[3].

Royalties

  • The Treaty provides that the withholding tax on royalties will be limited to 10%.
  • Taiwan levies 20% withholding tax on royalties paid to non-resident corporations under its domestic law.
  • In principle, Luxembourg does not levy withholding tax on royalties under its domestic law[4].
  • The definition of royalties includes films or tapes for television or radio broadcasting.

Capital gains

In line with article 13 of the OECD Model Convention (OECD Model), the Treaty provides that gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a territory has in the other territory or of movable property pertaining to a fixed base available to a resident of a territory in the other territory for the purpose of performing independent personal services, including such gains from the alienation of such a permanen t establishment (alone or with the whole en terprise) or of such fixed base, may be taxed in that other territory.

Shipping and air transport

The Treaty provides that profits from the operation of ships or aircraft in international traffic include:

a) Profits from the rental on a full basis or a bareboat basis of ships or aircraft

b) Profits from the use, maintenance or rental of containers used for the transport of goods or merchandise where such rental or such use, maintenance or rental, as the case may be, is incidental to the operation of ships or aircraft in international traffic.

Elimination of double taxation

  • The first part of the article provides for an exemption method to avoid double taxation in Luxembourg. In addition, the Treaty provides that are deduct from Luxembourg income taxes (i) dividends, interest, royalties and other income received by a Luxembourg. company, and (ii) income received by artists and sportspersons from a Taiwan company.
  • The second part of the article provides for a credit method to avoid double taxation in Taiwan.

Exchange of information

The Treaty and the Protocol contain an exchange of information provision in line with article 26 of the OECD Model.

Entry into force

Taiwan has already signed the Treaty and the Protocol. Provided that the legal process is finalized within the course of this year, the Treaty will come into force as of 1 January 2015.

 

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[1] “The furnishing of services, including consultancy services, by an enterprise of a territory through employees or other personnel or persons engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) in the other territory for a period or periods aggregating more than 6 months with any 12-month period.”

[2] Article 7(3) “In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or except in the case of banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.”

[3] A 15% withholding tax is due in Luxembourg on certain types of bonds issued by a Luxembourg company.

[4] A 10% withholding tax is due in Luxembourg on revenue derived by non-Luxembourg resident taxpayers from some literary, artistic and sportive activities carried out in Luxembourg.