U.S. income tax treaty with Luxembourg

Treaty documents and protocols

The IRS page for Luxembourg lists five items: a 1962 income tax treaty text hosted by the IRS, the 1996 convention as printed by the Senate and hosted on govinfo, the 2009 Protocol with its exchange of notes, Treasury's Technical Explanation of that Protocol, and a 2016 Treasury statement on treaty negotiations. The 1962 convention is not the current treaty. The current one is the convention signed at Luxembourg on April 3, 1996, which states that it replaces the 1962 convention.^{[1][2][6][10]}

Under Article 30, the 1996 convention took effect for withholding on amounts paid on or after the January 1 following entry into force, and for other taxes for periods beginning on or after that date. Treasury's 2016 statement gives December 20, 2000 as the entry into force date, and IRS Table 3 shows a general effective date of January 1, 2001. Article 30(3) let a person elect the 1962 convention for one first year if it gave greater relief.^[8][10][12]

The Protocol signed May 20, 2009 replaces Article 28, the exchange of information article. Treasury says it entered into force on September 9, 2019. Under its Article II it applies to requests made after entry into force for tax years beginning on or after January 1, 2009, which matches the Protocol date in Table 3.^[6][8][11]

The 2016 Treasury statement describes talks on a further protocol aimed at income that Luxembourg treats as attributable to a permanent establishment in a third state. The IRS tables list no later protocol.

Convention article titles

The 1996 convention has 31 articles. Their titles are General Scope; Taxes Covered; General Definitions; Residence; Permanent Establishment; Income from Real Property; Business Profits; Shipping and Air Transport; Associated Enterprises; Dividends; Branch Tax; Interest; Royalties; Gains; Independent Personal Services; Dependent Personal Services; Directors' Fees; Artistes and Sportsmen; Pensions, Social Security, and Annuities; Government Service; Students, Trainees, Teachers, and Researchers; Other Income; Capital; Limitation on Benefits; Relief from Double Taxation; Non-Discrimination; Mutual Agreement Procedure; Exchange of Information; Diplomatic Agents and Consular Officers; Entry into Force; and Termination. An exchange of notes records agreed readings of several articles.^[10]

Dividends, interest and royalties

Article 10 lets both countries tax dividends. Where the beneficial owner is a resident of the other country, the source country's tax may not exceed 5 percent of the gross amount if the owner is a company that owns directly at least 10 percent of the payer's voting stock, and 15 percent in all other cases. Paragraph 6 denies the 5 percent rate to dividends paid by a U.S. regulated investment company or REIT, and for most REIT dividends it also denies the 15 percent rate. IRS Table 1 shows the same 15 and 5 percent figures.^[10][7]

Under Article 10(2)(b), Luxembourg does not tax a dividend paid by a Luxembourg company to a U.S. company that has held at least 25 percent of its voting stock without interruption for two years, if the dividend comes from an active Luxembourg business. This differs from the 1962 convention, which tied the 5 percent rate to a 50 percent holding and a payer income test.^[10]

Article 12(1) makes interest taxable only in the beneficial owner's country of residence, so the source country does not tax it. Exceptions cover interest determined by the issuer's profits, which the source country may tax at up to 15 percent, and excess inclusions from a real estate mortgage investment conduit, which domestic law governs.

Article 13(1) likewise makes royalties taxable only in the beneficial owner's country of residence, and Table 1 shows 0 percent. Paragraph 5 of Articles 12 and 13 limits the benefit to arm's-length amounts, and every benefit depends on the limitation on benefits article.^[10][7]

Residence and dual residence

Article 4 treats as a resident a person that is liable to tax in a country because of domicile, residence, citizenship, place of management, place of incorporation or a similar criterion, but not a person taxed there only on income from sources in that country. A U.S. citizen or green card holder who is not a Luxembourg resident counts as a U.S. resident for the convention only if the individual has a substantial presence, permanent home or habitual abode in the United States.^[10]

If an individual is a resident of both countries, Article 4(2) looks in order to a permanent home, the center of vital interests, habitual abode and nationality, and then leaves the question to the competent authorities. For a company resident in both, the competent authorities try to agree, and failing that the company is treated as a resident of neither for the convention's benefits. Under Article 24(10), Luxembourg holding companies under the 1929 law and similar companies are not residents. The 1962 convention had no comprehensive definition of residence.^[10]

Information exchange and limitation on benefits

Article I of the 2009 Protocol replaced Article 28. The new text covers information foreseeably relevant to carrying out the convention or the domestic laws on taxes of every kind at the national level, and the exchange is not restricted by Article 1. Treasury's explanation says this can reach U.S. estate and gift taxes, excise taxes and Luxembourg value added tax. An exchange of notes lists what a request must contain. For years before 2009 the pre-Protocol Article 28 continues to apply.^[3][4][11]

Article 24 is the limitation on benefits article, and IRS Table 4 lists it for Luxembourg. A resident gets all benefits only if it is a qualified resident. That includes an individual, a government, a company at least half of whose principal share class is ultimately owned by qualified residents or U.S. citizens and whose deductible payments to others stay within 50 percent of gross income, a company whose principal share class is regularly traded on a recognized exchange, and certain controlled companies and not-for-profit organizations.^[10][9]

Other residents may qualify for an item of income tied to an active business in their own country that is substantial relative to the activity abroad, with ratio tests of 7.5 percent each and 10 percent on average. A company owned 95 percent by seven or fewer residents of NAFTA or EU states can qualify under conditions, and a competent authority can grant benefits. Paragraph 5 cuts benefits for income attributable to a third-country permanent establishment taxed at under half the home rate, with a 15 percent ceiling on dividends, interest and royalties.^[10]

Saving clause and U.S. citizens

Article 1(3) lets the United States tax its residents, and its citizens by reason of citizenship, as if the convention had not come into effect. For this purpose a citizen includes a former citizen whose loss of citizenship had tax avoidance as one of its principal purposes, for 10 years after the loss. Paragraph 4 keeps some benefits in place, including those under Article 9(2), Article 19(1)(b) on social security payments, and Articles 25, 26 and 27. Articles 20, 21 and 29 stay available to people who are neither citizens nor permanent residents of the United States. The saving language of the 1962 convention has been superseded.^[10]

Questions and answers

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.