Double Tax Treaty between Luxembourg
and Jersey, Guernsey and Isle of Man
On 5 June 2014, the Luxembourg Parliament voted the draft law approving the Income and Capital Tax Treaties between Luxembourg and Jersey, Guernsey and the Isle of Man, signed respectively on 17 April 2013, 10 May 2013 and 8 April 2013, and the Protocol to these Treaties signed the same day.
The Income and Capital Tax Treaties concluded with the aforementioned countries generally follow the approach adopted by the OECD Model Tax Convention. With a few minor exceptions, the wording of the three treaties is the same, so that the commentaries below are applicable to all of them.
According to the provisions of the three treaties (article 27), the Contracting Parties shall notify each other as soon as the procedures required by its domestic law for the entry into force have been satisfied. The three treaties will thus enter into force on the date of receipt of the last notification.
The main features of the Treaties are described hereafter:
Resident of a Contracting Party
- Article 4 is intended to define the meaning of the term “resident of a Contracting State” and to solve cases of double residence. The respective Protocol to each of the three treaties recognizes collective investment vehicles established in a Contracting Party as resident (if treated as a body corporate for tax purposes) or individual (if not treated as body corporate for tax purposes) of such Contracting State. Consequently, collective investment vehicles are entitled to claim the benefits of the respective Treaty.
- Article 5, which gives a general definition of the term “permanent establishment”, is aligned on the wording of the OECD Model Tax Convention. No particular features like for example service permanent establishments have been foreseen.
- The Treaties provide that the withholding tax on dividends will be limited to 5% of the gross amount of dividends if the bene ficial owner is a c ompany (other than a p artnership) which holds directly at least 10% of the capital of the company paying the dividend. No minimum holding period is required. In all other cases, the withholding tax rate is 15% of the gross amount of the dividends paid.
- The Treaties grant a lower rate than under Luxembourg domestic law (15% withholding tax). However, under Luxembourg domestic law, dividends distributed by Luxembourg companies to companies in treaty jurisdictions are exempt from withholding tax under certain conditions.
- The domestic law of respectively Jersey, Guernsey and Isle of Man does not provide for any withholding tax on dividends paid to non-residents.
- The Treaties provide that interest will not be subject to withholding tax.
- In principle, Luxembourg does not levy withholding tax on interest under its domestic law. Consequently, this provision will not impact interest payments made by a Luxembourg taxpayer.
- The same applies as regards Jersey, Guernsey and Isle of Man since the respective domestic laws do not provide for withholding tax on interest payments.
- The Treaties provide for exclusive right of taxation for the country of residence of the beneficial owner of the royalties.
- In principle, Luxembourg does not levy withholding tax on royalties under its domestic law. As a result, this provision will not impact royalty payments made by a Luxembourg taxpayer.
- No withholding tax on royalties should in principle apply under domestic law in Jersey, Guernsey and Isle of Man.
- The Treaties provide for exclusive right of taxation of capital gains realized from the disposal of a shareholding for the country of residence of the beneficial owner of the capital gains.
- In principle, capital gains realized by non-resident shareholders are not subject to tax in Luxembourg. As a result, this provision will have limit impact in Luxembourg.
- No withholding tax on capital gains should in principle apply under domestic law in Jersey, Guernsey and Isle of Man.
Elimination of double taxation
- As a general rule, the Treaties provide that any income derived or capital owned by a Luxembourg resident that may be taxed in Jersey, Guernsey and Isle of Man should be exempt in Luxembourg.
- Nevertheless, income derived by a permanent establishment of a Luxembourg company in Jersey, Guernsey and Isle of Man and dividends derived by a Luxembourg company from Jersey, Guernsey and Isle of Man may be subject to tax in Luxembourg, but Luxembourg should grant a credit for taxes paid in Jersey, Guernsey and Isle of Man. Such credit should not exceed the Luxembourg tax which is attributable to such items of income.
- Dividend income derived by a Luxembourg company from Jersey, Guernsey and Isle of Man should be exempt in Luxembourg provided that the Luxembourg company holds directly at least 10% of the capital of the company paying the dividends since the beginning of the accounting year and if this company is subject in Jersey, Guernsey and Isle of Man to an income tax corresponding to the Luxembourg tax. Under the same conditions, such shareholding should be exempt from the Luxembourg capital tax. The exemption should also apply notwithstanding that the subsidiary is exempt from tax or taxed at a reduced rate.
Exchange of information
Relevant information in relation to the application of the Treaties may be exchanged upon request between the Contracting States.
Download the Tax Alert (pdf, 84kb).
 The parent company has to be fully subject to tax corresponding to Luxembourg income tax, and has to hold, or commit to hold, at least 10% of the share capital or a participation with an acquisition cost of at least EUR 1.2 million for at least 12 months.
 A 15% withholding tax is due in Luxembourg on certain types of bonds issued by a Luxembourg company.
 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.
 According to Luxembourg domestic law, capital gains realized by non-resident shareholders are only taxable in Luxembourg on substantial participations held in Luxembourg resident entities if the disposal takes place within six months of the acquisition of the participation.