On 16 October 2024, the Grand Duchy of Luxembourg and the Sultanate of Oman have signed a treaty 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 take effect on 1st 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. In other words, the earliest the DTT could become applicable would be 1 January 2026, if the procedures are completed in both countries this year.
Withholding taxes
Withholding tax on dividends paid to beneficial owners who are resident in the other Contracting State cannot exceed 0%, if the beneficial owner is a company that holds, directly or indirectly, at least 10% of the capital of the paying company. In all other cases, the withholding tax on dividend distributions shall not exceed 10%.
Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other Contracting State. This means that no withholding tax can be levied by the Contracting State on interest payments. By providing for the exclusive taxation of interest payments in the Residence State, the DTT diverges from the OECD model convention.
Withholding tax on royalty payments made to beneficial owners in the other Contracting State cannot exceed 8%. On this point, the DTT diverges again from the OECD model convention, which provides for exclusive taxation of royalties in the Residence State only.
Independent personal services
Interestingly, the DTT also includes a specific provision for professional services of or other activities of an independent character in Article 14, 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. On this point again, the DTT diverges from the current OECD model convention, which recommends to not independently refer to independent personal services, but to include them in the general taxation of business profits section.
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, no real estate rich clause has been included, as currently recommended by the OECD model convention.
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 business profits, dividend, royalties and capital gains, Luxembourg will apply the credit method. However, concerned taxpayers may nevertheless rely on the domestic participation exemption provided they meet the conditions, with the specific addition that the comparable taxation test should be met, even if the Omani company is exempted from tax or taxed at a reduced rate in the Sultanate of Oman and if these dividends are derived out of profits from activities in agriculture, industry, infrastructure or tourism in the Sultanate of Oman.
Entitlement to benefits
As recommended by the OECD model convention, the DTT includes an entitlement to benefits clause, which however remains limited, by solely including a principal purpose test and foreseeing the possibility of discretionary relief.
Certain collective investment vehicles may benefit from the DTT
The governments of Luxembourg and Oman 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 and as the beneficial owner of the income they receive for the purpose of the DTT. Likewise, collective investment vehicles which are established in a Contract State and which are not treated as a body corporate for tax purpose shall be considered as resident individuals and as the beneficial owner of the income they receive for the purpose of the DTT.
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