Double taxation treaty between Luxembourg and UAE

Further to its ratification by both countries, the Double Taxation Treaty concluded between Luxembourg and the United Arab Emirates (the “Tax Treaty”) has now entered into force.

The provisions of the Tax Treaty (and its protocol) are effective as follows:

For Luxembourg withholding taxes: January 1st, 2010
For corporate taxes and net wealth tax: tax years starting on or after January 1st, 2010
For the provisions of the Tax Treaty in respect with international transport: tax years starting on or after January 1st, 2000 (retroactive effect!)

The main benefits of the Tax Treaty are highlighted below:

Residence:

The notion of residence reflects the OECD model except for the definition of the governmental institutions which includes certain United Arab Emirates sovereign funds (listed in the protocol to the Tax Treaty).

For the purposes of the Tax Treaty, a Luxembourg tax resident is a person or an entity that, under the laws of Luxembourg, is subject to tax therein by reason of his/its residence, domicile, place of management or any other criterion of similar nature, and also includes any Luxembourg local authority and the State of Luxembourg.

For the purposes of the Tax Treaty, a United Arab Emirates resident is any company or other legal entity created under the laws of the United Arab Emirates, United Arab Emirates nationals, or any individual considered as a United Arab Emirates resident under the United Arab Emirates laws, a local government institution/authority.

Interests	Interests and royalties are taxable only in the state of the beneficial owner. No withholding tax is levied in the paying country.
Royalties
Dividends	Taxation on dividends by the source country may not exceed: 0% if the dividends are distributed to the State, one of its local authorities, one of its local government institutions, or one of its financial institutions that are resident of the other contracting State *(). 5% of the gross dividend amount if the beneficial owner is a company (other than a partnership) that directly holds at least 10% of the share capital of the company which distributes the dividends. 10% of the gross dividend amount in any other case. ()* For the United Arab Emirates, the institutions are listed in the protocol to the Tax Treaty (other may be added in the future). Certain sovereign funds are included. Rem: In addition, according to Luxembourg internal tax law, there is no withholding tax on dividends paid by a Luxembourg company to a company that is resident in a country which has concluded a tax treaty with Luxembourg provided that (i) the beneficiary owns at the time of the distribution a shareholding of at least 10% in the Luxembourg company for an uninterrupted period of 12 months and (ii) the beneficiary is liable to comparable corporate income tax. Should these conditions not be fulfilled, the reduced rate of withholding tax should apply.

Interests

Interests and royalties are taxable only in the state of the beneficial owner.
No withholding tax is levied in the paying country.

Royalties

Dividends

Taxation on dividends by the source country may not exceed:

0% if the dividends are distributed to the State, one of its local authorities, one of its local government institutions, or one of its financial institutions that are resident of the other contracting State (*).
5% of the gross dividend amount if the beneficial owner is a company (other than a partnership) that directly holds at least 10% of the share capital of the company which distributes the dividends.
10% of the gross dividend amount in any other case.

(*) For the United Arab Emirates, the institutions are listed in the protocol to the Tax Treaty (other may be added in the future). Certain sovereign funds are included.

Rem: In addition, according to Luxembourg internal tax law, there is no withholding tax on dividends paid by a Luxembourg company to a company that is resident in a country which has concluded a tax treaty with Luxembourg provided that (i) the beneficiary owns at the time of the distribution a shareholding of at least 10% in the Luxembourg company for an uninterrupted period of 12 months and (ii) the beneficiary is liable to comparable corporate income tax. Should these conditions not be fulfilled, the reduced rate of withholding tax should apply.

Capital gains:

As a general rule, capital gains shall be taxed only in the contracting state where the alienator is resident.
Gains derived from the alienation of immovable property may be taxed in the country where the property is located. However, the Tax Treaty does not contain any specific provisions relating to the taxation of capital gains realized on the sale of shares of a company whose assets are mainly represented by immovable property. Therefore, the general rule will apply (i.e. taxation in the country where the alienator/seller is resident).

Exchange of information:

The Tax Treaty contains a provision in respect with the exchange of information between both contracting states. Based on the parliamentary comments, this clause of the Tax Treaty is expected to be amended shortly in order to comply with the OECD standards on the exchange of information. For the time being, this clause has not been amended.

Relief of double taxation:

As far as Luxembourg is concerned, revenues taxed in the UAE will be exempt from tax in Luxembourg (subject to the progressivity provision).
Income derived through a permanent establishment of a Luxembourg company in the UAE will be subject to tax in Luxembourg. However, a tax credit is granted for any income tax levied in the UAE.

Treaty shopping:

The Tax Treaty contains a specific provision according to which both contracting states shall cooperate in order to avoid treaty shopping and shall consult each other to find a mutual solution in this respect.

Files:

Double taxation treaty between Luxembourg and UAE enters into force

Back to News