Thanks to the DTA, the platform Luxembourg-Hong Kong may become the greatest gateway for Asian investors wishing to make efficient investments in Europe and even outside Europe through the large network of double tax treaties concluded by Luxembourg. This will result in various cash tax benefits for such investors. Similarly, the Luxembourg and Hong Kong bridge could also provide advantages for any investors wanting to invest in Asia with minimal tax leakage.
The Hong Kong Special Administrative Region does not currently levy any withholding tax on dividends. The DTA, however, provides for an exemption from withholding tax for dividends received by a Hong Kong company that holds directly at least 10% of a Luxembourg company or participation with an acquisition price of at least EUR 1.2 million in the Luxembourg company paying the dividends. Such provision is consistent with the 2009 Luxembourg tax reform providing for a withholding tax exemption on dividends paid to corporate recipients in countries that have concluded a tax treaty with Luxembourg with however the additional benefit that no holding period is required by the DTA concluded with Hong Kong.
According to the DTA, interest and royalties are taxable in the country where the beneficiary is located. This DTA ensures that investors benefit from the most favorable rate on royalties, with a reduction from Hong Kong’s current domestic withholding tax rate of 4.95% to 3%. Luxembourg does not levy any withholding tax on royalties.
Capital gains derived from real estate-rich companies remain taxable in the country where the immovable property is located. However, this rule does not apply to gains derived from the alienation of shares:
- Quoted on such stock exchange as may be agreed between the parties; or
- Alienated or exchanged in the framework of a reorganization of a company, a merger, a division or a similar operation; or
- In a company deriving more than 50 per cent of its asset value from immovable property in which it carries on its business. In all other cases of share transfer, the DTA grants taxing power to the jurisdiction where the beneficiary is residing for tax purposes.
The wording of the article on shipping and air transport deviates from the article of the OECD Model Convention. It defines such income in four categories:
- Income derived from the lease of ships or aircraft on a bareboat charter basis where such lease is incidental to the operation of ships or aircraft in international traffic;
- Income derived from the sale of tickets and the provision of services connected with such transport whether for the enterprise itself or for any other enterprise, provided that in the case of provision of services, such provision is incidental to the operation of ships and aircraft in international traffic;
- Interest on funds directly connected with the operation of ships or aircraft in international traffic; and
- Profits from the lease of containers by the enterprise, when such lease is incidental to the operation of ships or aircraft in international traffic. Such income is taxable in the state where the beneficiary is located.
Luxembourg companies doing business through a permanent establishment in Hong Kong will be fully exempt from Luxembourg taxation. Similarly dividends (as well as capital gains) received by Luxembourg corporation from an Hong Kong company can be tax exempt if the conditions of the Luxembourg participation exemption regime are met.
Moreover, the DTA does not contain any provision that specifically excludes a Luxembourg fund(SICAV/F) from DTA benefits.
This is only the fourth comprehensive agreement for the avoidance of double taxation concluded by Hong Kong. This DTA will foster closer economic links between the two financial places.
It is expected that both countries exchange the instruments of ratification before the end of this year. Once ratified, the DTA will have effect in the Hong Kong Special Administrative Region as from April 1st, 2008 and in Luxembourg as from as January 1st 2008.
Besides the DTA, Luxembourg formalized this year a Memorandum of Understanding between the CSSF (Commission de Surveillance du Secteur Financier) and the CBRC (China Banking Regulatory Commission) through which Qualified Chinese Domestic Investors (QDIIs)can invest on behalf of their clients into financial products regulated by the Luxembourg supervisory authority. The QDII scheme allows approved banks, asset managers, securities dealers and insurance companies to collect deposits and savings to invest in overseas equities and investment funds. This MOU is also a major asset in helping Luxembourg position itself in Mainland China.
