Luxembourg Report
By Jean-Pierre Winandy
Answers to the Questionnaire and Special Reports on the Interest Savings Directive (“the
Directive”) , from Prof. Frans Vanistendael.
III. Questions of implementation
Brief overview
A distinction is made between resident and non resident taxpayers.
1) Resident taxpayers
Traditionally, Luxembourg has applied a so-called synthetical (as opposed to a schedular)
income tax system, i.e. all categories of net income of different kinds (i.e. business income,
income from capital, rental income, etc.1) are added up together and are subjected to a single
tax schedule (the exact content of which depends on the personal situation of the taxpayer).
Over the last years, a number of important exceptions to this principle have been introduced into
the tax laws so that the principle is in the nowadays really challenged. Until recently, (net)
income from capital (whether dividends or interest) has been added to the other income
categories and it has always been taxable at progressive rates, varying from zero to 38,95%
currently.
In the meantime this situation has changed significantly: in 1994 the classical double taxation
system applicable to dividend income from “capital companies” has been abolished in the sense
that half of the dividends from resident companies (extended in the meantime to non resident
ones), is tax exempt provided the income is subject in the hands of the distributing companies to
a tax corresponding to the Luxembourg corporate income tax rate. The system exempting half
of the dividends does represent a valid solution providing for neutrality in respect of the form of
the business operation in the sense that it guarantees that ultimately the income is taxed at
roughly the same rate regardless of whether the activity is exercised in the hands of a capital
company, before being distributed to the shareholders as dividends or whether the business
activity is exercised in the form of a transparent partnership or in the form of a single proprietor.
Dividends are subject to a 20% withholding tax which is however fully creditable against income
tax due (and possibly reimbursed).
Capital gains on shares are also taxable as ordinary income if realised within 6 months of the
acquisition or if the shareholder holds a significant shareholding (10% of the capital at least): in
this latter case, taxation is made at “half the average global rate” (i.e. a maximum of 19%).
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Article 10 of the income tax code provides for 8 categories of income.
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Traditionally, interest income is taxable at normal rates (38,95% at the peak) after deduction of
a lump sum abatement of 1.500 euro from the taxable amount. Operating expenses are
deductible in all the cases for dividends as well as for interest income. A withholding tax (of
20%) applies only in very rare cases, i.e. in case of “profit sharing bonds” and in case of interest
paid to the “silent partner” in consideration for his contribution to the silent partnership. As for
dividends, the full credit is granted for these taxes.
Taxation of interest income has changed dramatically since 1 January 2006 in the sense that
since that date interest income received by a Luxembourg resident from a Luxembourg financial
institution is subject to a 10% withholding tax on interest and this taxation is final. This
withholding tax system is very similar (albeit different on some points) to the system provided for
by the Luxembourg law on the basis of the savings directive. This introduction of a domestic
withholding tax was seen as a compensation for the abolition at the same date of the net worth
tax for physical persons2.
2) Non resident taxpayers
Non resident taxpayers are subject to taxes (by way of a 20% withholding tax) only in the
following cases:
- dividends (but not liquidation proceeds on liquidation of a company) received from
Luxembourg companies,
- interest on profit sharing bonds and payments to the silent partner.
A non resident taxpayer is taxable by way of assessment in case he disposes of a substantial
participation (i.e. of more than 10%) in the capital of a Luxembourg company held for less than
6 months. If a tax treaty applies there will be no taxation in Luxembourg.
The tax treaties concluded by Luxembourg with other countries do generally not provide for
special provisions deviating substantially from article 11 of the OECD Model Convention.
III. Questions of implementation
1. Luxembourg has fully implemented the interest savings directive. As mentioned above it
even introduced a similar (although not identical system on interest payments made to
resident taxpayers).
2. A specific law has been adopted, the law of June 21st 2005, namely « Loi du 21 juin
2005 transposant en droit luxembourgeois la directive 2003/48/CE du 3 juin 2003 du
Conseil de l’Union européenne en matière de fiscalité des revenus de l’épargne sous
forme de paiement d’intérêts », (hereafter « the Law »). Extensive administrative
guidelines to this Law have been issued by the Revenue authorities in the form of the
Circulaire RIUE no 1 of 29 June 2005 (hereafter “the Circulaire”).
3. The same concepts and the same definitions as in the Directive have been used in the
Law, the concept of “beneficial ownership” had already been introduced before in the
money laundering regulation (also pursuant to an EC Directive).
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The net worth tax (at a rate of 0,5%) remains in force for legal persons.
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4. Luxembourg tax laws do not provide for a beneficial ownership concept. From German
tax laws the concept of economic ownership is known. This means that for a trust for
instance the beneficiary of the income is either the settlor, the trust or the beneficiary of
the trust depending on the provisions of the trust deed. It has to be said that the
application of this concept does often not give clear guidelines.
5. Under the previously existing systems of withholding tax, the obligations to withhold the
tax always lay with the debtor of the income. The concept of paying agent was not
known by Luxembourg tax laws before the savings directive. The concepts used by the
Directive have as such been used by the Luxembourg legislation.
6. The concept of interest income is not defined by Luxembourg tax laws. Article 97 of the
LIR mentions in different paragraphs several types of interest income which are
declared subject to taxation; interest income was in nearly all the cases exempt from
withholding taxes under national law. The interest definition of the directive is broader
than the one of the LIR. The Circulaire declares that the correct reference for the
definition of interest is Article 11 of the OECD Model Convention and the Commentaries
thereto.
7. In Luxembourg, the exchange of information is, as a principle, the exception and will
only apply in cases where a specific mandate is given by the client. The Law takes care
to organize the exchange of information which is made by the competent authority at
least once per year and at the latest before 30 June of the following year (Art. 9 (2)).
8. Regarding the transfer of information to other countries: The Law does provide for
comprehensive rules applicable to the exchange of information.
9. There are no rules on the exchange of information from one paying agent to the other
one within Luxembourg.
10. All the documents foreseen by the Directive are mentioned by the Law and also
qualified as minimum standards (which seems to suggest that additional information
might be asked for).
11. The Law (Art. 13) provides that a tax credit is obtained in Luxembourg for the
withholding tax levied on the basis of the savings directive or of the international
conventions directly connected to that directive. This credit which presumably is granted
for the year in which the withholding tax is made (and which corresponds to the year in
which the income is taxable in Luxembourg) is not subject to any limitations.
IV. Unresolved legal questions
1. According to the developments made in the Circulaire, it is clear that the residence as
determined on the basis of the place of living is in fact founding only a legal
presumption which may be overthrown: the Circulaire deals with the case of the
European civil servants which keep their residence in the country in which they were
established on the moment they joined the European Institutions. In such case, a
Luxembourg former resident who moved his domicile to Bruxelles is not subject to the
savings directive rules in as far as he is taxwise a resident of Luxembourg. This position
has to be approved and accordingly the residence under international law will prevail.
2. If it turns out that a taxpayer is a resident of a Member State other than the one
indicated by the paying agent then the information gathered can be forwarded to the
correct state of residence.
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3. The question of a non cooperative beneficial owner is less of an issue in a country
applying withholding tax. The tax is levied in Luxembourg in any case. For countries
applying the exchange of information, duties should be imposed on cooperation of nonresident taxpayers.
4. The fact that a given directive refers to existing instruments for definition of its concepts
is in reality useful and efficient. It should not in my view give rise to additional confusion.
5. The information provided under article 8 of the Directive looks adequate and sufficient
to allow for taxation in the state of residence.
6. It would be more effective to have a direct exchange of information in lieu of a two step
procedure. However, the two step procedure gives an additional guarantee that no
unwarranted exchanges of information take place: such additional guarantee is the
more needed in case of withholding tax countries where the taxpayer is legitimately
entitled to count on the fact that no exchange takes place unless he specifically agrees
to such exchange.
7. In a purely internal situation the paying agent would be allowed to transfer the
information directly to the taxpayer concerned. In a withholding tax country the
exchange of information is the exceptional solution which will only be applied in case of
an express and specific authorisation from the taxpayer. In these circumstances it does
not seem odd if the taxpayer is informed of the information.
8. Luxembourg law does not provide for a mechanism allowing for correction in case a
Member State would not deliver any useful information. Incidentally it may be said that
Luxembourg does not expect much information from the other Member states in the
sense that it has introduced the 10% final tax on interest from Luxembourg banks which
is hoped to repatriate funds from foreign jurisdictions to Luxembourg. (In order to
enhance the efficiency of this measure the law of 23rd December 2005 provides for a
kind of amnesty for taxpayers who in the past have not declared the funds now
repatriated).
9. Under the Circulaire (p. 13), the definition of interest excludes any payments which are
not interest under the commentaries to article 11 of the OECD Model Convention, and it
mentions that in this way are excluded derivative products, structured finance products,
etc. in as far as they are not included by the commentaries to article 11 of the Model
Convention.
10. The role of the interest definition for a country applying withholding tax results in an
obligation for it to tax this interest in the form of the levy of the tax. For the country of
residence it does not contain an obligation to tax.
V Questions of withholding and retention tax
1) Specific rules are provided by the Law (art. 9 (2)) which takes over the provisions of the
directive and distinguishes between client relationships established before 1 January
2004 and those established after that date. The Law (in compliance with the directive)
mentions
- the identity, address of the beneficiary or of the residual entity,
- the identity of the paying agent,
- the account number of the beneficial owner or of the residual entity,
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2)
3)
4)
5)
6)
7)
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- the total amount of the interest received or the total amount of the reimbursement
proceeds.
The objective of the Directive is to ensure an effective application of the laws of the
residence state (point 8 of the preamble). Although this point refers to the “effective
taxation” in that state this wording should not be construed as requiring an actual
taxation, but only the effective application of the tax laws of the residence state. A
different interpretation would lead to a grossly unequal treatment in the two following
cases: there would be no taxation in case of exchange and taxation in case no
exchange takes place (and accordingly the withholding tax applies). This result cannot
be justified. (It is true that this result can easily be avoided by the taxpayer : it suffices
for him to ask for the exchange of information or to produce a certificate from his tax
authorities).
In Luxembourg, capital gains on securities would normally not be taxable. The Directive
gives the right to tax these “capital gains”.
There would normally not be a cumulative levy of national and European withholding
tax: in case the beneficiary is a resident there will be a levy of a 10% withholding tax
which represents a final taxation; if the beneficiary is resident in the European Union
there is a 15% withholding tax.
Applying the system of exchange of information would require the amendment of
banking secrecy provisions.
In case of capital gains realised, the Law specifies that the interest concept does only
include the part of the capital gain corresponding to the interest accrued since the entry
into force of the Law (or the later date of acquisition of the shares). Just as in case of
dividend distributions by investment funds, an application of the principle of limited
transparency is made here. The Circulaire refers to the concept of TIS (taxable interest
per share). This concept requires that the fund is able at any moment to say how much
taxable interest (per share) has accrued since the moment of acquisition of the share
until the moment of sale/redemption. If the amount of TIS is unknown to the paying
agent, the full gain is subject to tax.
The cases of withholding tax on interest income are limited to those of profit sharing
bonds and the remuneration of the silent partner. In both cases the rate is 20%; as
specified by the Circulaire, this rate is reduced by treaty provisions and it would be so
reduced to zero in a lot of cases. If such is not the case (for instance because there is
no treaty), then the question on which order the two taxes are levied is unanswered.
The Circulaire, although confirming the fact that both levies can be made concurrently,
does not address the issue. From a Luxembourg perspective, the answer should in my
opinion be as follows:
The solution consisting in applying both levies on the gross interest is to be rejected
because logically both levies cannot be made at the same moment. In the absence of
any specification given by the directive or by the Law, the most favourable solution to
the taxpayer should be adopted. In the hands of the taxpayer, a difference does exist
between the two types of withholding taxes: the internal one is very generally more
difficult to obtain credit against: the credit against this tax is limited to the amount of the
national income tax due on the net income received. By contrast, no such limitation
exists with respect to the “Directive withholding tax” which has always to be fully
credited. In other words, if a cumulative levy has to occur, then it should first apply the
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special withholding tax followed by the levy on the ordinary withholding tax (on the then
lower amount).
8) This hypothesis is envisaged neither by the Law nor by the Circulaire.
9) The case of no taxation in the country of residence of the beneficiary is envisaged by
the Circulaire (page 6): if it is established that there is no taxation in the country of
residence, then there will be no withholding tax. How this exemption is implemented is
not mentioned. However, it is easy for the taxpayer to avoid the levy of the tax: either
ask for the exchange of information or produce a certificate issued by the tax authorities
declaring the account on which the interest payments are made.
10) If the beneficial owner changes residence during the tax year it has to be assumed (in
the absence of any legal provisions) that there will be an allocation of the revenue
income on the basis of the tax levied during the respective residence periods in country
A and in country B.
11) Whether national anti-avoidance provisions would allow taxation of income in case of
companies in low tax countries? In the authors view the answer is no in case the
taxpayer is established in a country other than Luxembourg: no Luxembourg tax is
avoided in this case. If the taxpayer is a resident of Luxembourg, the national antiabuse provision could potentially be applicable for the reason that Luxembourg taxes
are avoided: whether abuse would actually be given would depend on the facts and
circumstances (including the intentions of the taxpayer) of the case at hand.
12) The income sharing mechanism is provided for in the Law. The auditing of the country
of residence is delegated by law to independent external auditors which certify to the
competent authority (i.e. the Revenue Authorities) the accuracy of the declarations
made by the paying agent. This method makes sure that the Revenue Authorities
cannot be required by the exchange of information procedure provided for by tax
treaties to exchange with treaty partners the information gathered on the basis of the
savings directive.
Luxembourg 15 March 2006
Dr. Jean-Pierre Winandy
Avocat, Assist. Prof., Université du Luxembourg
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