We have waited since October 2022 for Luxembourg to join the UK in ratifying the amended Double Taxation Treaty (“DTT”). Now this has taken place, we note other commentators agree the changes to the UK-Lux DTT have many elements. This article summarises some of those elements, and explains how Centralis Group can provide best in class support to those advised to amend structures.
What will change?
Examples include:
- Capital/chargeable gains: gain(s) arising from indirect investment(s) by Luxembourg resident investors in UK real estate may in future be subject to UK tax (e.g., share sales(s)).
Once in force, the DTT will stipulate that the gain(s) of a Luxembourg resident entity that arise(s) upon a disposal of shares, or similar interests, and which derive 50% or more of their value from UK situs immovable property, may be taxed in the UK. This 50% threshold should, however, be considered in the context of the UK’s relevant domestic legislation. The UK’s domestic legislation applies the charge to tax where an entity derives, directly or indirectly, at least 75% of its gross value from UK real estate. 75% is therefore the more relevant threshold[1].
The existing, primary taxing rights afforded to Luxembourg in such circumstances (albeit somewhat diminished since November 2017) will cease. Furthermore, the amended DTT makes no provision for the “grandfathering” of existing structures. The changes will impact young and old alike.
- Dividend withholding tax (“WHT”): the amended DTT will bring the potential for a 0% WHT rate in respect of dividends paid from Luxembourg to a qualifying UK beneficial owner. This will be a good thing, for those who (can) wait, due to the:
- current lowest UK-Lux DTT dividend WHT rate being 5%, and
- inability, in some cases, to rely on the EU Parent/Subsidiary Directive following Brexit.
As with all tax matters, tailored advice will be important to ensure the 0% can be applied. For example, the 0% rate may not apply when dividends are paid to a Real Estate Investment Trust.
- Royalties: the amended DTT will also introduce a 0% WHT rate upon the payment(s) of royalties. This compares to a 5% rate in the currently in force DTT.
There will also be (presentational) changes to those entitled to UK-Lux DTT benefits, vis-à-vis the Principal Purpose Test. In practical terms, however, these changes have had effect ever since the relevant UK-Luxembourg Multi-Lateral Instrument came into force.
When will these changes take effect?
The amended DTT is expected to enter into force for:
- UK corporation tax/capital gains tax purposes from April 2024,
- UK withholding taxes from 1 January 2024,
- Luxembourg tax purposes with effect from 1 January 2024.
What now?
The ratification of the amended DTT between the UK and Luxembourg may bring significant change(s), which could impact your investments and tax situation. It’s important to understand these changes and seek professional advice to navigate them effectively.
Those able to avail themselves of lower WHT rates may want to wait a little longer yet (before paying dividends, for example). Those with indirect investments in UK immovable property will likely wish to re-evaluate their structure(s) without further delay.
Centralis Group can support you through this process.
Why Centralis Group?
Centralis Group, with offices in 11 jurisdictions, is well versed in global tax challenges. Centralis Group’s Luxembourg office has a team of highly-qualified staff, who:
- have professional qualifications in accounting, legal, tax, and treasury
- provide a proactive approach to service delivery.
With a team on the ground in both the UK and Luxembourg, our clients and prospects can be assured of industry leading knowledge, guidance and attention to detail from our team. Please contact Sebastien Francois, at sebastien.francois@centralis.lu, or Sutharman Kanagarajah, at sutharman.kanagarajah@centralisgroup.co.uk
[1] Please see Schedule 1A Taxation of Chargeable Gains Act 1992 (“TCGA”), making provision for the purposes of s1A(3)(c) and s2B(4)(b) TCGA.