Entry into force
The income and capital double tax treaty between Cape Verde and Luxembourg was signed on 13 January 2022 (“DTT”). On 21 June 2023, the Luxembourg Government Council approved the ratification of the DTT.
The DTT will enter into force as from 1 January of the year following the exchange of notification between the contracting states. In Luxembourg, the ratification of the new DTT requires a law, the draft of which (No. 8282) was submitted to the Luxembourg Parliament (Chambre des Députés) on 20 July 2023. The entry into force of said law is expected in the course of the year, so that the DTT would likely enter into force as of 1 January 2024, provided the formalities are completed in time in Cape Verde as well.
Tax residency
While the DTT foresees the standard wording with regards to residents, the protocol to the DTT states that undertaking for collective investments that are treated as companies for the purposes of taxation in the contracting state in which they are established are considered as resident of that contracting state and as the beneficial owner of the income they receive, for the purposes of the DTT.
Dividend withholding tax
Withholding tax on dividends paid to beneficial owners resident in the other contracting state cannot exceed 10%. A reduced withholding tax rate of 0% will however be available to distributions made to beneficial owners that is a company holding directly or indirectly at least 10% of the capital of the distributing company for an uninterrupted period of at least 12 months (preceding the dividend payment).
Interest withholding tax
Withholding tax on interest payments made to beneficial owners in the other contracting state cannot exceed 10%. The DTT foresees a withholding tax exemption for interest payments however in very limited situations.
Royalties withholding tax
Withholding tax on royalty payments made to beneficial owners in the other contracting state cannot exceed 10% withholding tax.
Capital gains
While the DTT largely follows the OECD model on the allocation of taxing rights on capital gains to the contracting state where the alienator is a resident, it does not foresee a real estate rich clause. As a result, solely capital gains from the alienation of immovable property situated in the other State; and from the alienation of movable property forming part of the business property of a permanent establishment may be taxed by the other State.
Gains Professional services
Last but not least, the DTT, contrary to the latest developments in the OECD model, includes an article 14 on the taxation of professional services and other activities of an independent character and foresees in addition to the standard criteria of a fixed base (the equivalent of a permanent establishment for professional services) an alternative criterion solely based on a remuneration exceeding EUR 25,000 per year without the need for a fixed base. Meeting one of the alternative thresholds would lead to a taxation right in the source state.
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