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Double tax treaty between Luxembourg and Hong Kong
Bill N°5862 on the approbation of the double tax treaty between Luxembourg and Hong Kong (hereinafter the “Treaty“), signed in Hong Kong, the 2 November 2007, has been adopted and submitted to the parliament on 4 April 2008.
Most of the rules of this Treaty are based on the OECD Model Convention. Its key features regarding the payment of dividends, interest and royalties are as follows:
- Dividends: dividends paid by a Luxembourg subsidiary to its parent company established in Hong Kong are not subject to any withholding tax (WHT) in Luxembourg if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends or a participation with an acquisition cost of at least EUR 1.200.000 in the company paying the dividends. In all other cases, withholding tax is limited to 10%. Hong Kong law does not provide for any WHT on dividends paid by a HK company to a Luxembourg parent company.
- Interest: interest arising in a Contracting Party and paid to a resident of the other Contracting Party shall be taxable only in that other Party. Thus, there are no WHT for interests and exclusive taxation takes place in the country of residence of the beneficial owner receiving such interest revenues.
- Royalties: a maximum of 3% WHT has been agreed for royalties. For the time being, this is the most attractive WHT rate applicable in the tax treaties signed by Hong Kong (regarding the payment of royalties for intellectual property (IP) rights, it should be noted that Luxembourg has recently established an 80% tax exemption on most IP rights revenues thus setting the effective tax rate at approx 5.9%. See our site for more details www.vocats.com)
Therefore, this Treaty provides for a competitive tax framework and should contribute to establish Luxembourg as a key location for foreign investors wishing to invest into Hong Kong and to host holding structures of Hong Kong companies investing into Europe or elsewhere.
Once ratified by both states, the Treaty shall apply retroactively in Hong Kong on 1 April 2008 and in Luxembourg on 1 January 2008.
