New double tax treaty concluded with the United Kingdom ratified by Luxembourg

Major changes

Compared to the Luxembourg-UK DTT currently still in force, major changes include:

• Introduction of a land-rich clause (art. 13 DTT)

The DTT introduces a so-called “land-rich clause" attributing the right to tax capital gains arising out of the alienation of shares in entities deriving more than 50% of their value directly or indirectly from immovable property (as defined by art. 6 of the new DTT) located in Luxembourg or the UK to the jurisdiction where the property is located.

As from the entry into force of the DTT, the UK will thus be entitled to tax capital gains on the sale by Luxembourg investors of shares in an entity holding UK real estate assets.

• Reduction of dividend withholding tax (art. 10 DTT)

The DTT now provides a full exemption from withholding tax on dividend distributions to the extent the recipient is the beneficial owner of the income, without further requirements.

This full exemption is however not available for distributions by investment vehicles which annually distribute most of their income and whose income including gains derives from immovable property that is tax exempt (e.g., UK REITs). In such a case, the DTT provides for a 15% withholding tax rate on the gross amount of the dividends, unless the beneficiary is a recognised pension fund, in which case the full exemption remains available.

• DTT access for collective investment vehicles (Para. 2 of the Additional Protocol to the DTT)

Under the Luxembourg-UK treaty currently still in force, Luxembourg collective investment vehicles (“CIVs") cannot claim treaty benefits when receiving income arising in the UK.

In contrast, based on Paragraph 2 of the Protocol, the new DTT will grant treaty benefits to Luxembourg CIVs such as Luxembourg UCITS, UCIs part II, SIFs and RAIFs (of the SIF-type) which have a corporate legal form (S.A., SCA, S.à r.l.). While no further condition will be required from UCITS having a corporate legal form, the other CIVs will avail themselves from this DTT access if at least 75% of their beneficial interests are held by “equivalent beneficiaries". Based on the DTT, “equivalent beneficiaries" means taxpayers that are resident of Luxembourg or of any other jurisdiction with which the UK has arrangements that provide for the exchange of information and who would be entitled to a rate of tax with respect to an item of income that is at least as low as the rate claimed under the DTT.

If the above conditions are met, a CIV will be considered as a resident of Luxembourg and as the beneficial owner of the income it receives. 

For other changes, please refer to our previous publication by clicking the following link: https://www.stibbe.com/publications-and-insights/new-double-tax-treaty-concluded-between-luxembourg-and-the-united-kingdom

Entry into force

In the UK:

• In respect of taxes withheld at source: for income derived on or after 1 January 2024;
• In respect of income tax and capital gains tax: for any year of assessment beginning on or after 6 April 2024;
• In respect of corporation tax: for any financial year beginning on or after 1 April 2024

In Luxembourg:

• In respect of taxes withheld at source: for income derived on or after 1 January 2024;
• In respect of other taxes on income and taxes on capital: for taxes chargeable for any taxable year beginning on or after 1 January 2024.

​Our tax team is available to assist you with the application of these rules.