New Germany - Luxembourg Tax Treaty


On 23 April 2012 the Federal Republic of Germany and the Grand Duchy of Luxembourg signed a new Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital ("Treaty"). The new Treaty is based on the OECD Model Tax Convention and follows the current German policies on double taxation treaties, e.g. regarding the exchange of information between the fiscal authorities of both contracting states. It is amended by a protocol ("Protocol") that constitutes an integral part of the Treaty.

The new Treaty results in an extensive revision of the currently applicable double taxation treaty dated 1958 ("1958 Treaty"). The new provisions affect, among others, the taxation of funds. Some of the new provisions specifically relate to certain types of funds, e.g.

the explicit provisions regarding the entitlement of regulated funds to Treaty benefits. Other amendments typically affect the taxation of funds, in particular German inbound investment structures used by Luxembourg private equity funds. We would like to draw your attention to the following:

change of the withholding tax rate with respect to dividends; increase in taxation of payments on certain hybrid financing instruments; establishment of right to tax with respect to capital gains from the disposition of shares in real estate companies. I. Entry into Force

The new Treaty will enter into force on 1 January of the year following the completion of the ratification process, i.e. presumably on 1 January 2013. The Treaty will replace the 1958 Treaty which is currently in force.

  1. Treaty Benefits for Regulated Funds

    The Protocol explicitly states that regulated funds will be entitled to claim Treaty benefits regarding the reduced withholding tax rates applicable to dividends and interest. In this context, the Protocol differentiates between investment companies and investment funds (Investmentvermögen); unlike the nomenclature of the German Investment Act ("GIA"), the term "investment funds" (Investmentvermögen) relates exclusively to funds of contractual type.

    1. Investment Companies

      Investment companies are entitled to claim a reduction of withholding taxes on dividends and interest payments in their own name (no. 1 para. 2 Protocol). The following entities qualify as investment companies: German Investment Stock Corporation and Luxembourg venture capital investment company (société d'investissement en capital à risque; SICAR), investment company with variable capital (société d'investissement à capital variable; SICAV) and investment company with fixed capital (société...

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