On 20 January 2009, the treaty between the Grand Duchy of Luxembourg and the Hong Kong Special Administrative Region of the People's Republic of China for the avoidance of double taxation and the prevention of fiscal evasion entered into force. The treaty, which was signed on 2 November 2007, entered into force with retroactive effect: as of 1 January 2008 for Luxembourg and as of 1 April 2008 for Hong Kong.
After Thailand, China and Belgium, Luxembourg is the fourth state with which Hong Kong has concluded a comprehensive double tax treaty which is in force. The treaty should create major opportunities for investments between Luxembourg and Hong Kong – and, more generally, between Europe and Asia – mainly because of its attractive tax treatment of outbound dividend, interest and royalty payments.
Introduction of zero-rated dividend withholding tax
One of the most important benefits of the treaty is that, under certain conditions, dividend payments by Luxembourg-resident companies to Hong Kong resident companies (other than partnerships) are subject to a 0% withholding tax.
Pursuant to the treaty, dividends paid by a company resident in one of the Contracting States to a recipient resident in the other Contracting State are exempt from withholding tax in the source state if the recipient is a company (other than a partnership) which directly holds at least 10% of the distributing company's share capital or a participation in that company with an acquisition cost of at least EUR 1.2 million. No minimum holding period is required.
If the above conditions are not met, a maximum withholding tax rate of 10% will apply.
Elimination of withholding tax on interest payments
Interest payments by a resident of one of the Contracting States to a resident of the other Contracting State are taxable only in the latter state. This means that crossborder interest payments are not subject to withholding tax in the source country (whether this is Luxembourg or Hong Kong).
Limited withholding tax exposure for royalty payments
Cross-border royalty payments may be taxed in the Contracting State in which the recipient is resident. Such payments may also be taxed in the source state (the other Contracting State), but in such a case the withholding tax may not exceed 3% of the gross amount of the royalties.
It should be noted that under Luxembourg national law, withholding tax is not levied on royalty payments (except in very limited situations).
Implications of treaty
Obviously, the most attractive aspect of the treaty is the provision allowing for a 0% dividend withholding tax. This will favour participations (whether of a strategic nature or merely for investment purposes) in Luxembourg companies by Hong Kong investors or corporate groups, or Asian investors or groups with a presence in Hong Kong. As such, the treaty should bring substantial advantages to such investors and groups, as it will to European companies and investors investing, or wishing to invest, in Hong Kong or Asia.