United States - Luxembourg Tax Treaty

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104TH CONGRESS "

2d Session

SENATE

! TREATY DOC.

104–33

TAXATION CONVENTION WITH LUXEMBOURG

MESSAGE

FROM

THE PRESIDENT OF THE UNITED STATES

TRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE GRAND DUCHY OF LUXEMBOURG FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RE- SPECT TO TAXES ON INCOME AND CAPITAL, SIGNED AT LUXEM- BOURG ON APRIL 3, 1996

SEPTEMBER 4, 1996.—Convention was read the first time and,
together with the accompanying papers, referred to the Committee on
Foreign Relations and ordered to be printed for the use of the Senate.

29–112

U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1996

LETTER OF TRANSMITTAL

THE WHITE HOUSE, September 4, 1996.

To the Senate of the United States:

I transmit herewith for Senate advice and consent to ratification the Convention Between the Government of the United States of America and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Luxembourg April 3, 1996. Accompanying the Convention is a re- lated exchange of notes providing clarification with respect to the application of the Convention in specified cases. Also transmitted for the information of the Senate is the report of the
Department of State with respect to the Convention.

This Convention, which is similar to tax treaties between the United States and other OECD nations, provides maximum rates of tax to be applied to various types of income and protection from double taxation of income. The Convention also provides for ex- change of information to prevent fiscal evasion and sets forth standard rules to limit the benefits of the Convention to persons that are not engaged in treaty shopping.

I recommend that the Senate give early and favorable consider- ation to this Convention and give its advice and consent to ratifica- tion.

WILLIAM J. CLINTON.

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LETTER OF SUBMITTAL

The PRESIDENT,

The White House.

DEPARTMENT OF STATE,

Washington, August 30, 1996.

THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratifica- tion, the Convention Between the Government of the United States of America and the Government of the Grand Duchy of Luxem- bourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Luxembourg April 3, 1996 (‘‘the Convention’’). Also en- closed for the information of the Senate is an exchange of notes which provides clarification with respect to the application of the Convention in specified cases.

This Convention will replace the existing Convention between the United States of America and the Grand Duchy of Luxembourg with Respect to Taxes on Income and Property signed December 18, 1962. The new Convention maintains many provisions of the existing convention, but it also provides certain additional benefits and updates the text to reflect current tax treaty policies.

This Convention is similar to the tax treaties between the United States and other OECD nations. It provides maximum rates of tax to be applied to various types of income, protection from double taxation of income, exchange of information to prevent fiscal eva- sion, and standard rules to limit the benefits of the Convention to persons that are not engaged in treaty-shopping. Like other U.S. tax conventions, this Convention provides rules specifying when in- come that arises in one of the countries and is derived by residents of the other country may be taxed by the country in which the in- come arises (the ‘‘source’’ country).

With respect to U.S. taxes, this Convention applies to federal in- come taxes (excluding social security taxes), and federal excise taxes imposed on premiums paid to foreign insurers other than premiums for reinsurance. For Luxembourg taxes, the Convention applies to the income tax on individuals, communal trade tax, cor- poration tax, capital tax, and tax on the fees of directors of compa- nies; it also applies to Luxembourg’s surcharges for its employment fund on individual income and corporate taxes. Like the 1962 con- vention, however, this convention does not apply to Luxembourg corporations that are now entitled, or subsequently become enti- tled, to special tax benefits available to companies that do not en- gage in an active trade or business, so-called 1929 holding compa- nies. These companies are exempt from Luxembourg income tax on

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the receipt of income, and their shareholders are exempt from Lux- embourg tax on the receipt of dividends from these companies.

The Convention establishes maximum rate of tax that may be imposed by the source country on specified categories of income, in- cluding dividends, interest, and royalties. In most respects, these rates are the same as in many recent U.S. treaties with OECD countries. With one exception, the withholding rates on investment income are generally the same as in the present U.S.-Luxembourg treaty. Dividends on direct investments are generally subject to tax by the source country at a rate of five percent. However, dividends paid by companies that are residents of Luxembourg will be ex- empt from taxation by the source country if derived by a 25-percent shareholder from a company engaged in the active conduct of a trade or business in Luxembourg. Portfolio dividends remain tax- able at 15 percent. In contrast, the current convention ties the tax rate on portfolio dividends to Luxembourg’s statutory rate of tax. Interest and royalties are generally exempt under the Conven- tion from tax by the source country as under the present treaty. In general, interest and royalties derived and beneficially owned by a resident of a Contracting State are taxable only in that State. This is not true, however, if the beneficial owner of the interest is a resident of one Contracting State and the interest arises in the other Contracting State from a permanent establishment through which the interest owner carries on business or from a fixed base from which the owner carries on personal services. In that situa- tion, the income is to be considered either business profits or inde-

pendent personal services income.

Like other U.S. tax treaties, this Convention provides the stand- ard anti-abuse rules for certain classes of investment income. In addition, the proposed Convention provides for the elimination of another potential abuse relating to the granting of U.S. treaty ben- efits in the so-called ‘‘triangular cases,’’ to third-country permanent establishments of Luxembourg corporations that are exempt from tax in Luxembourg by operation of Luxembourg law. Under
the proposed rule, full U.S. treaty benefits will be granted in these ‘‘tri- angular cases’’ only when the U.S.-source income is subject to a sig- nificant level of tax in Luxembourg and in the country in which the permanent establishment is located.

The taxation of capital gains under the Convention is similar to the rule in the present treaty and recent U.S. tax treaties. Gains from the sale of personal property are taxed only in the seller’s State or residence unless they are attributable to a permanent es- tablishment or fixed base in the other State.

The proposed Convention generally follows the standard rules for taxation by one country of the business profits of a resident of the other. Each Contracting State may tax business profits of an enter- prise of the other State only when the profits are attributable to a permanent establishment located in the first state.

As with all recent U.S. treaties, this Convention permits the United States to tax branch operations. This is not permitted under the present treaty. The proposed Convention also accommodates a provision of the 1986 Tax Reform Act that attributes to a perma- nent-establishment income that is earned during the life of the per-

manent establishment but is deferred and not received until after the permanent establishment no longer exists.

Consistent with U.S. treaty policy, the proposed Convention per- mits only the country of residence to tax profits from international carriage by ships or airplanes and income from the use or rental of ships, aircraft, or containers. Under the present treaty, only the State where the ship or aircraft is registered may tax the income derived from the operation of the ships or aircraft.

The taxation of income from the performance of personal services under the proposed Convention is essentially the same as that under other recent U.S. treaties with OECD countries. Such income is taxable only the State of the person’s residence unless the person has a fixed base regularly available in the other Contracting State. Unlike many U.S. treaties, however, the proposed Convention al- lows the resident state to tax the income derived from employment abroad a ship or aircraft operated in international traffic if the en- terprise’s Contracting State fails to tax the income.

The proposed Convention contains standard rules making its benefits unavailable to persons engaged in treaty-shopping. The current treaty contains no such anti-treaty-shopping rules. Under the proposed Convention, a company will be entitled to benefits if it is a ‘‘qualified resident’’ of a Contracting State as defined in the Convention.

The proposed Convention contains a variation on certain deriva- tive benefits provisions contained in recent treaties between the United States and the member states of the European Union. The proposed Convention allows subsidiaries of publicly-traded compa- nies to obtain benefits if seven or fewer residents of a state
that is a member of the European Union or a party to the North Amer- ican Free Trade Agreement own at least 95 percent of the company and the other state has a comprehensive income tax convention with the Contracting State. The treaty does not establish a mini- mum threshold for Luxembourg ownership.

The proposed Convention also contains the standard rules nec- essary for administering the Convention, including rules for the resolution of disputes under the Convention and for exchange of in- formation. Unlike the current convention, the proposed Convention contains a provision dealing with items of income that are not dealt with specifically in other articles. Such a provision is standard in our modern treaties.

The Convention authorizes the General Accounting Office and the Tax-Writing Committees of Congress to obtain access to certain tax information exchanged under the Convention for use in their oversight of the administration of U.S. tax laws and treaties.

This Convention is subject to ratification. It will enter into force on the day that the instruments of ratification are exchanged. It will have effect with respect to taxes withheld by the source coun- try for payments made or credited on or after the first day of Janu- ary following entry into force and in other cases for taxable years beginning on or after the first day of January following the date on which the Convention enters into force. When the present con- vention affords a more favorable result for a taxpayer than the pro- posed Convention, the taxpayer may elect to continue to apply the

provisions of the present convention, in its entirety, for one addi- tional year.

This Convention will remain in force indefinitely unless termi- nated by one of the Contracting States. Either State may terminate the Convention by giving at least six months of prior notice through diplomatic channels.

An exchange of notes accompanies the Convention and is pro- vided for the information of the Senate. This exchange of notes clarifies the application of the Convention in specified cases. For example, the notes specify that certain information pertaining to fi- nancial institutions may be obtained and provided to certain U.S. authorities only in accordance with the terms of the Treaty Be- tween the United States and Luxembourg on Mutual Legal Assist- ance in Criminal Matters. That treaty, which sets forth the scope of that obligation, is expected to be signed shortly and submitted to the Senate for its advice and consent to ratification.

A technical memorandum explaining in detail the provisions of the Convention will be prepared by the Department of the Treas- ury and will be submitted separately to the Senate Committee on Foreign Relations.

The Department of the Treasury and the Department of State co- operated in the negotiation of the Convention. It has the full ap- proval of both Departments.

Respectfully submitted,

LYNN E. DAVIS.

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