In June 2008, the Grand Duchy of Luxembourg and the Republic of India signed a treaty for the avoidance of double taxation and the prevention of tax evasion. The ratification process having being completed by both countries on 9 July 2009, the treaty entered into force on that same date. The provisions of the treaty will apply, in the case of Luxembourg, to financial years starting on or after 1 January 2010 and, in the case of India, to financial years starting on or after on 1 April 2010. The main features of the treaty are summarised below.
The maximum withholding tax rate applicable to cross-border dividend payments is 10% (of the gross dividend amount). This rate applies irrespective of the size of the shareholding in the distributing company.
Of course, for dividend payments by a Luxembourg company it is possible to benefit from the withholding tax exemption under Luxembourg national law and reduce the rate to 0%. This exemption, is available for payments to companies established in a country which has concluded a double taxation treaty with Luxembourg (provided certain other conditions are met). This means that that the conclusion of the treaty per se was crucial for the applicability of the Luxembourg national withholding tax exemption to India-bound dividend payments.
Cross-border interest payments may also be subject to 10% withholding tax on the gross amount of interest paid. However, pursuant to the treaty the withholding tax does not apply in certain cases.
Under Luxembourg national law, interest payments are not subject to withholding tax (except in very rare circumstances). Consequently, interest payments by a Luxembourg borrower to an Indian lender may even benefit from a withholding tax rate of 0%.
Royalties & fees for technical services
Cross-border royalty payments can be taxed in the contracting state in which the recipient is resident. Such payments may also be taxed in the source state, but in such a case the withholding tax may not exceed 10% of the gross royalty amount.
Fees paid for technical services, such as managerial or consultancy services, are treated the same as royalty payments and, therefore, might be subject to a 10% tax at source.
Under Luxembourg national law, royalties and fees for technical services are also exempt from withholding tax. This means that royalties paid by a Luxembourg company to an India-resident company can be made free of Luxembourg withholding tax.
While most capital gains are only subject to tax in the contracting state in which the alienator is resident, gains realised on the sale of shares in a company are subject to tax in the contracting state in which that company is located. Similarly, gains from the alienation of shares held in a company whose main assets consist, directly or indirectly, of real estate located in a contracting state are subject to tax in the country in which the real estate is located. Conclusion
Despite some deviations from the OECD model convention, the treaty is expected to encourage Luxembourg companies to seek new or further investment opportunities in India, as well as further enhancing the attractiveness of Luxembourg's tax environment for Indian corporate groups that are deciding where to locate their European holding and finance companies.