Laos concludes first-ever tax treaty with a Western country: Luxembourg
The Tax Convention between the Grand-Duchy of Luxembourg (“Luxembourg”) and the Lao People’s Democratic Republic (“Laos”) dated 4 November 2012 (“the Convention”) was ratified by Luxembourg on 14 June 2013 and recently by Laos on 21 October 2013. The effective date is 30 days after both countries have exchanged the instruments of ratification. This is expected to be very soon.
- Taxpayers should revisit their existing Laotian structures,
- For future investments, the new favourable provisions should be borne in mind.
The key points of the Convention relate to dividends, interest, royalties, capital gains, and international standard of exchange of information upon request and are summarized hereafter:
The Convention provides for a withholding tax rate of 5% where 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. In all other cases, the dividend withholding tax amounts to 15%.
For a Luxembourg subsidiary paying dividends to its Laotian parent, the Convention does not have an impact since withholding tax rates on dividends paid to Laotian companies can typically be reduced to 0% given the conditions for the application of the Luxembourg participation exemption regime (as provided under article 147 of the Luxembourg Income Tax Law - “LITL”) should in general be met.
Based on Laotian domestic tax law, a dividend paid by a Laotian subsidiary to its Luxembourg parent company is subject to a 10% withholding tax. Therefore, the Convention might lead to a further reduction of dividend withholding tax to 5%. In Luxembourg this dividend should usually be exempt based on article 166 LITL (i.e., provided the Luxembourg parent holds at least 10% of the capital of its Laotian subsidiary or a stake with an acquisition price of at least € 1.2 million during an uninterrupted period of at least 12 months).
The Convention provides for interest payments to be generally subject to a maximum 10% withholding tax rate. This rate can be reduced to nil notably if the interest is paid to the state, the central bank, a local authority resident in the state in which they are generated or to a financial institution.
The benefits of the Convention for the interest payments by Luxembourg companies to non-residents are limited since interest payments are generally not subject to withholding tax under Luxembourg domestic tax law.
However, given the domestic withholding tax rate of 10% applied by Laos on interest payment to non residents, the reduced withholding tax rate of 0% applied for the payment to the state, the central bank, the local authorities and the financial institutions is particularly beneficial.
The Convention foresees a 5% withholding tax rate on royalties. The withholding tax reduction applies to a broad range of royalties including films or tapes used for radio or television broadcasting.
The impact is neutral since (i) royalties paid by a Luxembourg company to non-residents are not subject to withholding tax under the Luxembourg domestic tax law and (ii) royalties paid by a Laotian company to a non-resident company are generally subject to a 5% withholding tax rate.
The Convention did not reproduce the standard clause of the Organisation for Economic Co-operation and Development (“OECD”) Model regarding capital gains realised upon the disposal by the shareholders of their interests in subsidiaries.
Indeed, capital gains realized upon the disposal by a shareholder of its interests in a subsidiary are only subject to tax in the state where the shareholder is resident. This equally applies to landrich companies.
Consequently, capital gains realized by a Luxembourg shareholder in a Laotian subsidiary should be tax exempt in Laos based on the Convention and in Luxembourg under the participation exemption regime.
Conversely, capital gains realized by a Laotian shareholder in a Luxembourg subsidiary may be taxable under the Laotian domestic tax law. Under the revised Tax Law of 2011, it is not clear whether such gains are treated as ordinary income – and taxed as part of the Profit Tax at 24% - or as separate income – and taxed under Income Tax at 10%. The Tax Department of the Ministry of Finance is in the process of checking this issue.
The provisions on exchange of information have been aligned to the 2005 OECD Model.
For further information, please do not hesitate to contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.