On 20 September 2023, the Luxembourg government submitted to the Luxembourg Parliament (Chambre des Députés) draft law No. 8311, aiming to ratify the amending protocol to the double tax treaty between Luxembourg and Germany (the “DTT”), as agreed and signed on 6 July 2023 in Berlin (the “Draft Law”).
The notable changes introduced by the amending protocol concern both the DTT itself as well as the former protocol from 2012 and are as follows:
Preamble
In line with the BEPS actions, the preamble has been adapted to clarify that the purpose of the DTT is to eliminate double taxation, without however creating the possibility of non-taxation or reduced taxation through tax avoidance or fraud. The protocol also adds the principal purpose test into the DTT, such that benefit will be denied if it is reasonable to conclude that obtaining that tax benefit was one of the principal purposes of any arrangement or transaction (subjective test). However, DTT benefits will still be granted if it can be demonstrated that granting such benefits, in the circumstances at hand, would remain in accordance with the object and purpose of the relevant provisions of the DTT (objective test).
Persons covered
Article 1, relating to covered persons has been enhanced by a new paragraph, which provides inter alia that the benefit of the DTT shall not be granted to tax transparent entities.
Interests
Article 11 of the DTT on interests is now worded in accordance with the OECD Model Tax Convention, in that the recipient of the interest payment needs to be the beneficial owner of such interest payment for Article 11 to apply.
Dividends
The DTT now contains a specific provision regarding the treatment of dividends paid by real estate investment trusts (so called “REITs”) or paid to undertakings for collective investments (“UCIs”), which are now subject to a 15% withholding tax.
The amended DTT foresees in its protocol that the term UCIs shall mean – as far as Luxembourg is concerned – UCIs subject to the law of 17 December 2010, specialised investment funds within the meaning of the law of 13 February 2007 and the reserved alternative investment funds within the meaning of the law of 23 July 2016, to the extent such UCIs do not take the form of a partnership. For Germany, this term covers any investment fund in the sense of the Investment Tax Act. The door has also been left open for other undertakings which may be widely held, hold directly or indirectly a diversified portfolio of securities or with the main purpose of investing directly or indirectly in immovable property with the aim of realising rental income, provided that they are subject to investor protection regulations in the contracting state of their establishment and have been set up in one of the contracting states, to be included, pursuant to an agreement between the competent authorities of the contracting states,
Remote working
The new version of the DTT provides for an increased tolerance threshold from 19 to 34 days of remote workdays for cross-border workers. By application of this increase of the tolerance threshold, cross-border workers, tax resident in Germany within the meaning of the DTT, employed in Luxembourg and exercising their salaried activity for up to 34 days outside of the Luxembourg territory, shall remain subject to tax in Luxembourg on such employment income.
The benefit of this 34-days tolerance has also been expanded to persons covered by Article 18 of the DTT, relating to public functions.
Finally, among the main clarifications made in the protocols on the taxation of employees, the following two are to be noted:
- an activity as an employee is only considered to be carried out during a working day in a contracting State when that activity is carried out for at least 30 minutes. This means for example that a cross-border German tax resident employee who reconnects from home in the evening to send emails for more than 30 minutes would be considered to have worked from Germany during that day, reducing the number of remaining tolerance days;
- in respect of remunerated on-call services, the right to tax on-call allowances belongs to the State where the person is physically present, even when the employee has not been called for service.
Abolition of arbitration procedure
Finally, the amending protocol specifies that the arbitration procedure provided for in paragraph 5 of Article 24 of the DTT will no longer apply to cases submitted on or after 1 January of the calendar year immediately following the year in which the amended protocol enters into force.
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