On 28 December 2015, the revised Luxembourg-Singapore Agreement for the Avoidance of Double Taxation (the New Treaty) entered into force. The New Treaty (1) allows Luxembourg investment vehicles to invoke benefits under the New Treaty, (2) reduces the withholding tax rates for dividends, interest and royalties, (3) increases thresholds to qualify cross border activity as a permanent establishment, (4) provides a more favourable tax treatment for international air transport and shipping income, and (5) abolishes the tax sparing credit after a five year grandfathering period. We expect these changes to positively impact the trade and investment flows between both jurisdictions. The provisions of the New Treaty will generally apply as from 1 January 2016.
The governments of Luxembourg and Singapore signed the New Treaty and a new protocol on 9 October 2013 to replace the existing treaty dating from 6 March 1993 (the Old Treaty). The New Treaty generally follows the OECD model convention.
The most significant features of the New Treaty can be summarized as follows:
Collective investment vehicles
The protocol to the New Treaty further clarifies that a collective investment vehicle is a resident if under the domestic laws of that state it is liable to tax. In addition, an exempt collective investment vehicle is still considered to be liable to tax and thus a resident if it meets all the requirements for exemption specified in the domestic tax laws. This provision provides helpful clarification and may allow Luxembourg investment vehicles, such as SICAV’s and SICAF’s, to invoke benefits under the New Treaty.
Dividends – no withholding tax
The New Treaty allocates an exclusive taxation right to the state of residence of the recipient if that recipient is beneficial owner of dividends. The Old Treaty only provided for a reduction to 5% or 10%. This will be particularly advantageous to a Singapore recipient receiving Luxembourg source dividends, as Luxembourg in principle applies a 15% dividend withholding tax. Singapore does not levy dividend withholding tax, thus this modification should not impact source taxation of Singapore outbound dividend payments to Luxembourg shareholders.
Interest – no withholding tax
The New Treaty also allocates exclusive taxation rights to the state of residence of the recipient if that recipient is beneficial owner of interest. The Old Treaty only provided for a reduction to 10%. This modification is especially beneficial where it concerns Singapore inbound financing, as Singapore subjects outbound interest payments to 15% withholding tax. Luxembourg generally does not apply withholding tax on interest payments.
Royalties – lower withholding tax
Under the New Treaty, the source state retains a taxation right on outbound royalty payments. However, the rate has been reduced from 10% under the Old Treaty to 7% under the New Treaty.
Permanent establishment (PE) – narrowed definition ‘construction’ and ‘services’ PE
Building sites and similar projects will only qualify as ‘construction’ PE when they last for more than twelve months (versus six months under the Old Treaty). The provision of services by an enterprise of one contracting state through employees or other personnel in the other contracting state will only give rise to a ‘services’ PE, if such activity continues for more than 365 days in any fifteen-month period (versus no minimum period under the Old Treaty).
Shipping and air transport – exclusive taxation rights for state of residence
The New Treaty allocates taxing rights over profits of an enterprise of one of the contracting states carrying on the operation of ships or aircrafts in international traffic to the state in which the enterprise is resident. Under the Old Treaty, profits were taxable in the contracting state where such profits were derived from (subject to a 50% reduction). Also, the scope of ‘profits from the operation of ships or aircraft in international traffic’ is clarified by including several specified profit items.
Abolishment tax sparing credit – 5 year grandfathering period
Under the Old Treaty, a tax sparing credit for withholding tax was available, allowing Luxembourg recipients to credit the withholding tax which would have applied if not for a Singapore tax exemption. This benefit is abolished under the New Treaty, but remains available during a five year grandfathering period.
The New Treaty and protocol will be effective in Luxembourg as from 1 January 2016. In Singapore, the provisions relating to withholding taxes on amounts paid will be effective as from 1 January 2016. The remaining provisions that relate to other taxes will have effect in Singapore as from ‘year of assessment 2017’, which effectively means calendar year 2016.