Opening up the Treaty to CIVs
As per the protocol to the Treaty, a Luxembourg collective investment vehicle (CIV) set up in the form of a body corporate for tax purposes (e.g., a Luxembourg SCA, SA or S.à r.l.) may qualify as a resident for purposes of the Treaty to the extent that the beneficial interests in the vehicle are owned by equivalent beneficiaries. If at least 75% of the beneficial interests in the CIV are owned by equivalent beneficiaries, or if the CIV is a UCITS, then the CIV is treated as a resident of Luxembourg and considered the beneficial owner of all income it receives.
An equivalent beneficiary can generally be defined as a person that would be entitled to a tax rate at least as beneficial as the tax rate proposed under application of the Treaty. Consequently, CIVs may now be entitled partially or wholly to Treaty benefits.
For Luxembourg, a collective investment vehicle is defined as including a UCI, UCITS, Specialized Investment Fund (SIF) and Reserved Alternative Investment Fund (RAIF).
Introduction of property-rich clause
An important difference between the Treaty and the text as currently applicable is the inclusion of the so-called property-rich clause. The Treaty allocates taxing rights to both states in respect of a gain realised in the event of a sale of shares or corporate interest in an entity deriving more than 50% of its value directly or indirectly from immovable property situated in the other state than the one in which the property is located (a property-rich entity).
Full dividend withholding tax exemption but for REITs
With respect to dividends, the Treaty provides for a full tax exemption in the source country provided the recipient is the beneficial owner of the payment. No further conditions apply.. This change allows Luxembourg distributing companies to bypass the test on comparable taxation or holding requirements of their UK shareholder(s) to be eligible for the Luxembourg dividend withholding tax exemptions under domestic law.
The Treaty does not accommodate a (withholding tax) exemption for distributions by investment vehicles that annually distribute most of their income and whose income or capital gains derived from real estate are tax exempt. The Treaty permits a 15% withholding tax rate on dividends distributed by such investment vehicle, unless the beneficiary is a recognised pension fund.
Deviating from not only the current treaty but also the OECD Model Convention is the allocation of taxation rights with regards to pensions. The Treaty no longer provides for the allocation of taxation rights to the state of residence only but rather provides for an allocation of taxation rights to both residency state and source jurisdiction with a focus on the allocation to the source jurisdiction.