United States-Luxembourg Tax Treaty

Luxembourg International Tax Compliance Rules

Quick Summary.  Located in Western Europe, the Grand Duchy of Luxembourg shares a border with France, Belgium and Germany.  Luxembourg consists of three districts and 12 cantons with its capital at the city of Luxembourg.

Luxembourg obtained independence in 1867.  It is a parliamentary democracy with a constitutional monarchy, the world’s only sovereign grand duchy.  The Constitution of Luxembourg, adopted in 1868, serves as the supreme law of the land.  Legislative power is vetted with a unicameral legislative body, the Chamber of Deputies, which is advised by the Council of State.  

Effective in 2020, Luxembourg’s Parliament implemented the EU Anti Tax Avoidance Directive regarding hybrid mismatches with third countries (“ATAD 2”), providing for hybrid mismatch rules.  “Reverse hybrid” measures are expected to be implemented in 2022.  Luxembourg is a signatory to the Organisation for Economic Co-operation and Development (OECD)-sponsored Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), which was ratified by Luxembourg’s Chambre des Députés.  

In addition, Luxembourg’s Parliament has approved a Bill (n°7465) implementing the Directive (EU) 2018/822, which provides for automatic exchange of certain tax information.  

A founding member of the European Economic Community (later the EU), Luxembourg is also a member of the OECD, United Nations, NATA and Benelux.  

U.S.-Luxembourg Tax Treaty

Luxembourg Tax Treaty.

• Convention Between the United States of America and the Grand Duchy of Luxembourg for the avoidance of double taxation of income, the prevention of fiscal evasion, and the promotion of trade and investment, signed at Washington on December 18, 1962
• 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 ON APRIL 3, 1996
• Protocol Amending 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
• PROTOCOL AMENDING 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 ON MAY 20, 2009, AT LUXEMBOURG (THE ‘‘PROPOSED PROTOCOL’’) AND A RELATED AGREEMENT EFFECTED BY THE EXCHANGE OF NOTES ALSO SIGNED ON MAY 20, 2009
• Technical Explanation of the Protocol signed at Luxembourg on May 20, 2010 (the “Protocol”), and the related Exchange of Notes (“Exchange of Notes”) amending 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, signed at Luxembourg on April 3, 1996
• Statement regarding bilateral tax treaty negotiations between the United States and Luxembourg and the Treatment of Certain Permanent Establishments

Currency.  Euro (EUR)

Common Legal Entities.  Public company (société anonyme (SA)), private limited company (société à responsabilité limitée (Sàrl)), simplified joint-stock company (société par actions simplifiée (SAS)), partnership (société en nom collectif (SNC)), société en commandite simple (SCS)), and branches.  

Tax Authorities.  Luxembourg Inland Revenue (Administration des contributions directes), the Registration Duties, Estates and VAT Authority (Administration de l’Enregistrement, des Domaines et de la TVA), and the Customs & Excise Agency (Administration des douanes et accises)

Tax Treaties.  Luxembourg maintains a broad treaty network.  It is a signatory to the OECD’s MLI.  

Corporate Income Tax Rate.  17%

Individual Tax Rate.  42%

Corporate Capital Gains Tax Rate. 15%

Individual Capital Gains Tax Rate.  May be limited based on holding period and other factors.  

Residence.  A company’s residence is determined by its legal seat or central administration.  Individual residence is determined based upon domicile or customary place of abode.  

Withholding Tax.

            Dividends. Up to 15%

            Interest. Up to 20%

            Royalties. 0%

Transfer Pricing.  Luxembourg employs an arm’s-length standard.  

CFC Rules.  Yes.  Undistributed income of a. CFC from non-genuine arraignments may be subject to the CFC tax regime.  

Hybrid Treatment.  Luxembourg has implemented anti-hybrid rules based upon the EU anti-avoidance directive and BEPS action 2.  

Inheritance/estate tax. Up to 48%.  

Information Exchange Under the Treaty

Under the existing treaty, the obligation to obtain and provide information to the other country is set out in paragraph 1. The information to be exchanged is that which is foreseeably relevant for carrying out the provisions of the Convention or the domestic laws of the United States or Luxembourg concerning taxes of every kind applied at the national level, to the extent that the taxation thereunder is not contrary to the Convention. This language incorporates the standard of the OECD Model, which is intended to provide for exchange of information in tax matters to the widest possible extent and, at the same time, to clarify that Contracting States are not at liberty to engage in “fishing expeditions” or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer.

This standard is interpreted consistently with 26 U.S.C. section 7602, which authorizes the IRS to examine “any books, papers, records, or other data which may be relevant or material.” (emphasis added). In United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that the language “may be” reflects Congress’s express intention to allow the IRS to obtain “items of even potential relevance to an ongoing investigation, without reference to admissibility.” (emphasis in original). However, the standard would not support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by residents of that Contracting State in the other Contracting State.

Exchange of information with respect to each State’s domestic tax law is authorized to the extent that taxation under domestic tax law is not contrary to the Convention. Thus, for example, information may be exchanged with respect to a covered tax, even if the transaction to which the information relates is a purely domestic transaction in the requesting Contracting State and, therefore, the exchange is not made to carry out the Convention. An example of such a case is provided in the OECD Commentary: a company resident in one Contracting State and a company resident in the other Contracting State transact business between themselves through a third-country resident company. Neither Contracting State has a treaty with the third state. To enforce their internal laws with respect to transactions of their residents with the third-country company (since there is no relevant treaty in force), the Contracting States may exchange information regarding the prices that their residents paid in their transactions with the third-country resident.

Tax Treaty Network – International Tax Attorneys

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