Entry into force
On 19 January 2024, the Grand Duchy of Luxembourg and the Republic of Colombia have signed a convention for the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance (the “DTT”). The ratification of the DTT is currently pending in Luxembourg.
The DTT will have effect on 1 January of the year following the exchange of notifications, between the contracting states, confirming that the procedures required by their respective legislations for the entry into force have been satisfied.
Dividend withholding tax
Interest withholding tax
Withholding tax on interest payments made to beneficial owners in the other contracting state cannot exceed 10%. The DTT also foresees a withholding tax exemption for interest payments in very limited situations (e.g. interest payments to financial institutions, to pension funds or to the state itself as well as to any of its political subdivisions).
Royalties withholding tax
Withholding tax on royalty payments made to beneficial owners in the other contracting state cannot exceed 10%. On this point, the DTT diverges from the OECD model convention, which provides for exclusive taxation of royalties in the residence state only.
Fees for technical services
The DTT also, quite uncommonly compared to the majority of Luxembourg’s double tax treaties, includes a specific provision which deals with so-called fees for technical services. The latter are defined in the DTT as meaning payments in consideration for any service of a managerial, technical, technical assistance or consultancy nature. Teaching in or by an educational institution as well as services rendered by an individual for the personal use of another individual are explicitly carved out.
The source state may tax fees for technical services at a maximum rate of 10% of their gross amount, even in cases where the service provider does not carry out its business through a permanent establishment.
Independent personal services
The DTT also includes a specific provision for professional services of or other activities of an independent character, which shall especially include independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. Any such income derived by a resident of one contracting state may be taxed in the other contracting state, in case the professional services are carried out through a fixed base regularly available to the taxpayer in that other contracting state or in case the taxpayer stays in that other contracting state for a period or several periods amounting to or exceeding in the aggregate 120 days in any twelve months period commencing or ending in the concerned fiscal year.
Capital gains
In line with the OECD model convention, the DTT generally provides that capital gains are taxed only in the contracting state where the alienator is a resident. However, notably the following capital gains derived by a resident of one contracting state may be taxed by the other state:
- gains from the alienation of immovable property situated in the other state;
- gains from the alienation of movable property forming part of the business property of a permanent establishment in the other state;
- gains from the alienation of shares (including comparable interests in a partnership or trust), if, at any time during the 365 days preceding the alienation, these shares derived more than 50 % of their value directly or indirectly from immovable property situated in that other state; and
- gains from the alienation of shares (including comparable interests or other rights in a partnership or trust) of a company that is a resident of (or, in the case of partnerships or trust, that is located in) that other contracting state, may be taxed in that other state if the alienator at any time during the 365 days preceding such alienation owned, directly or indirectly at least 20% of the capital. However, the tax so charged cannot exceed 10 % of the amount of the gains. Exemptions may apply in very specific cases.
Elimination of double taxation
In general, Luxembourg will apply the exemption method for the purpose of eliminating double taxation for most types of income. In certain situations, like dividends, interests and royalties, Luxembourg will apply the credit method. However, concerned taxpayers may nevertheless rely on the domestic participation exemption provided they meet the conditions.
Certain collective investment vehicles may benefit from the DTT
The governments of Luxembourg and Colombia agreed, in a protocol to the DTT, that they will consider any collective investment vehicles which are established in a contracting state, and which are treated as a body corporate for tax purposes in that contracting state as residents for the purpose of the DTT. Consequently, Luxembourg corporate investment funds should thus benefit from the provisions of the DTT.
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