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LUXEMBOURG - new draft bill - exemption of withholding tax on dividends paid to treaty countries

October 2008 - Tax & Private Client. Legal Developments by Chevalier & Sciales .

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On 1 October 2008, a draft bill (n°5924) introducing new favourable tax measures was submitted to the Luxembourg Parliament. We set out hereunder a brief overview of the main changes that are proposed and that relate to companies.

• The exemption of withholding tax on dividends paid to corporate shareholders located in countries with which Luxembourg has signed a double tax treaty. This expansion of the participation exemption regime would seriously enhance the attractiveness of Luxembourg as a jurisdiction for the repatriation of profits. Currently, most treaties signed by Luxembourg provide for a reduced rate of withholding tax (generally 5% instead of the domestic withholding tax of 15%). Practically, if the bill is voted, this would reduce the withholding tax on dividends paid by a Luxembourg company to its parent company located in a country with which Luxembourg has signed a double tax treaty to 0%;

• As already mentioned by the Prime Minister in a speech addressed to the Luxembourg Parliament on 22 May 2008, the Luxembourg overall income tax would be reduced gradually over a period of a couple of years from 29,63% to 25,5%. If the draft bill is voted, the overall corporate income tax rate would already be reduced to 28,59%;

• Introduction of new favourable measures in relation to the law of December 2007 on income and capital gains derived from intellectual property. Currently, 80% of income and capital gains derived from intellectual property rights is exempt from corporate income tax. The draft bill would introduce the following measures: (1) qualifiying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5% and (ii) domain names are, as from tax year 2008, are eligible to the 80% tax exemption on income derived from intellectual property.

Although this bill is not yet voted, it is expected to be approved so that the measures would be applicable as of the year 2009.

For more information please visit www.cs-avocats.lu  or contact Olivier Sciales at oliviersciales@cs-avocats.lu.