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Luxembourg and Singapore sign revised Double Tax Agreement - 25/10/2013


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On 9 October 2013, the governments of Luxembourg and Singapore signed a revised double taxation agreement (the “new Treaty”) together with a new Protocol to replace the existing treaty dating from 1993.

The most remarkable novelty of the new Treaty is the taxation of dividend and interest only in the country of the recipient investor eliminating, as such, any withholding tax at source on dividend and interest paid from one country to the other. The Treaty also provides for a reduction of the withholding tax on royalties from 10% to 7% and confirms that “collective investment vehicles” qualify as “Resident” for the purposes of applying the new Treaty. Other changes include new definitions of “construction” and “services” permanent establishments and the reduction of tax arising from the disposal of Shipping and Air Transport. Finally, it is interesting to note that the new Treaty does not introduce a “real estate rich clause” and that the exclusion of treaty benefits for income derived by a branch in a third country has been removed.

The main features of the new Treaty and the new Protocol are detailed below.

Resident

The new Treaty has been completed with a Protocol that provides that a collective investment vehicle will be considered resident for treaty purposes “if under the domestic laws of that State it is liable to tax therein by reason of its domicile, residence, place of management or any other criterion of a similar nature. A collective investment vehicle is also considered liable to tax if it is subject to the tax laws of that Contracting State but is exempt from tax only if it meets all the requirements for exemption specified in the tax laws of that Contracting State”.

For Luxembourg SICAVs / SICAFs this further clarification may potentially confirm the position of the Luxembourg tax authorities with the entities possibly qualifying as resident under the provisions of the new Treaty.

Permanent establishment

The most notable changes brought by the new Treaty affects mainly the “construction permanent establishment”, i.e. the one arising from the existence of a building site, and the “furnishing of services permanent establishment”, i.e. the one arising from the presence of employees of an enterprise of one contracting state in the other contracting state. The changes aim to narrow the definition of permanent establishment by introducing or prolonging timeframes to conclude the existence of a permanent establishment [1].

[1] For the construction permanent establishment: 12 months (instead of 6 months within a 12 months period). For the furnishing of services, including consultancy services: 365 days within 15 months.

Shipping and Air Transport

The new Treaty provides for an exclusive taxation right of profits of an enterprise of one of the Contracting States from the operation of ships or aircraft in international traffic in the state where the enterprise is resident.

The new Treaty also added a more precise definition of “profits from the operation of ships or aircraft in international traffic”.

Dividend

The new Treaty provides for an exclusive taxation right of dividends in the country of the recipient, under the usual condition that the recipient is the beneficial owner of the dividends.

Under the new Treaty, the treatment of cross border dividend payments is particularly very beneficial in a Singapore outbound investment context, whereby a Singaporean recipient receives a Luxembourg source dividend [2]. No Luxembourg withholding tax will apply irrespective of the percentage of shareholding (usually between 10% and 25%) and irrespective of the quality (company or not) of the recipient [3].

[2] Currently this provision is irrelevant from a Singapore inbound context since no withholding tax applies on dividend under Singapore domestic tax law.
[3] Under the current Treaty in force, dividend is subject to withholding tax of 15%, possibly reduced to 10% or 5% under conditions (or 0% under the conditions of the Luxembourg participation exemption regime).

Interest

The same rule for dividends also applies to interest, meaning that interest will only be taxable in the country of the recipients, providing they are the beneficial owner.

While the dividend clause was particularly relevant for Singapore outbound investment schemes, the new clause for interest is, on the contrary, more beneficial in a Singapore inbound financing context, i.e. where a Luxembourg taxpayer receives interest from a Singapore source. While interest was subject to 15% withholding tax, potentially reduced to 10%, interest can now be paid free from Singaporean withholding tax allowing many opportunities between the two jurisdictions in terms of financing activities.

Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, they can also be taxed in the Contracting State.  Where the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 7% of the gross amount of the royalties (10% in the current Treaty).

Trustee

It is worth noting that for dividend, interest and royalties, the new Protocol provides further clarification that “a trustee liable to tax in a Contracting State in respect of dividends, interest or royalties shall be deemed to be the beneficial owner of that interest or those dividends or royalties”.

Entry into force

In Luxembourg, the provisions of the new Treaty and Protocol will have effect as from 1 January of the year following the year in which the new Treaty entered into force.

In Singapore, provisions relating to tax withheld at source will apply to amounts paid as from 1 January of the year following the year during which the new Treaty entered into force. Provisions in respect of tax chargeable would enter into effect only on 1 January of the second calendar year following the one in which the new Treaty entered into force.

The provisions of the existing treaty will no longer apply when the new Treaty enters into effect, although article 23(1)(c) of the existing treaty (which allows tax credits for certain types of financial income) will be grandfathered for five years.

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