Luxembourg - United Kingdom double tax treaty enters into force, replacing 1967 treaty

Following a publication in the Official Gazette of Luxembourg, the new Convention for the Elimination of Double Taxation with respect to Taxes on Income and on Capital and the Prevention of Tax Evasion and Avoidance (the Treaty), signed on 7 June 2022, entered into force on 22 November 2023.

Among other things, the Treaty provides for a withholding tax exemption on interest, royalties and dividend distributions, unless the dividends are paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle that distributes most of this income annually and receives tax-exempt income from the immovable property. In such case, a maximum withholding tax of 15% shall apply. The withholding tax exemption would however still apply if the beneficial owner of the dividends is a recognized pension fund as defined in the Treaty.

The Treaty also introduces a "real-estate rich" clause according to which capital gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State, may be taxed in that other State.

The Protocol to the Treaty also extends the benefits of the Treaty to certain Luxembourg Collective Investment Vehicles that are established and treated as body corporate for tax purposes in Luxembourg. For a detailed overview of the provisions of the Treaty please refer to EY Global Tax Alert, Luxembourg and the United Kingdom sign new double tax treaty, dated 20 June 2022.

The provisions of the Treaty will apply:

• In Luxembourg from 1 January 2024
• In the UK:
  • For withholding taxes from 1 January 2024
  • For income and capital gains taxes from 6 April 2024
  • For corporation tax from 1 April 2024

The provisions of Article 24 (Mutual agreement procedure) and Article 25 (Exchange of information) have effect from 22 November 2023 without regard to the taxable period to which the matter relates. However, the applicability of Article 25 is also subject to the condition that the information could have been supplied under the provisions of the prior Treaty.

From these effective dates, the Treaty replaces the former double tax treaty between Luxembourg and the UK of 24 May 1967.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Advisory Services Sàrl, Luxembourg City

• Bart Van Droogenbroek, Luxembourg Tax Leader
• Christian Schlesser, International Tax and Transaction Services Leader
• Dietmar Klos, Real Estate Sector Leader
• Elmar Schwickerath, Global Compliance and Reporting Leader
• Laurent Capolaghi, Accounting, Compliance and Reporting Leader
• Marie Sophie Hélier, Banking & Insurance Tax Leader
• Nicolas Gillet, Transfer Pricing Leader
• Olivier Bertrand, Private Equity Tax Leader
• Patricia Gudino Jonas, Infrastructure Tax Leader
• Renaud Labye, Asset Services Tax Leader
• Rosheen Dries, EMEIA Wealth & Asset Management Tax Leader
• Vincent Rémy, Credit Funds Leader

Ernst & Young LLP (United States), Luxembourg Tax Desk, Chicago

• Alexandre J. Pouchard
• Andres Ramirez-Gaston

Ernst & Young LLP (United Kingdom), London

• James Taylor
• Ian Dennis
• Alex Christoforou
• Russell Gardner
• Richard Milnes

Ernst & Young LLP (United States), UK Tax Desk, New York

• Graham Shaw

Ernst & Young LLP (United States), FSO Tax Desk, New York

• Alex Magee

Ernst & Young LLP (United States), Transaction Tax Desk, New York

• Alex Prince

Ernst & Young LLP (United States), US Tax Desk, Chicago

• Sarah Logan

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.