Tax Treaty between Seychelles and Luxembourg
The Tax Convention between the Grand-Duchy of Luxembourg ("Luxembourg") and the Seychelles dated 4 June 2012 ("the Convention") entered into force on 19 August 2013. It will be effective from 1 January 2014.
This Convention is one of the first concluded by Seychelles, especially with a Western Country.
Information about Seychelles
Seychelles is well known for its beautiful white sanded beaches, flora and landscape. However, it has also developed as a stable offshore business centre.
- Taxpayers should revisit their existing Seychelles 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, international standard of exchange of information upon request and investment funds and are summarized hereafter:
The Convention1 provides for a dividend withholding tax rate of 10% which is reduced to nil where the beneficial owner is a company (other than a partnership) which holds at least 10% of the capital of the company paying the dividends.
For Luxembourg subsidiaries paying dividends to Seychelles shareholders, where the Seychelles shareholder holds less than 10% in the Luxembourg subsidiaries, the withholding tax rate on dividends paid to Seychelles shareholders can still be reduced to 0% further to the Luxembourg participation exemption regime (as provided under article 147 of the Luxembourg Income Tax Law - "LITL"). In addition, dividends received by a Seychelles shareholder from its Luxembourg subsidiaries are tax-exempt in Seychelles.
Seychelles domestic withholding tax on dividends paid by a Seychelles subsidiary to its Luxembourg shareholders is typically 15%, thus the Convention would lead to a reduction2. Luxembourg domestic tax law exempts dividends received from Seychelles companies based on the Luxembourg participation exemption regime (as provided under article 166 of the LITL).
The Convention3 provides for gross interest payments generally subject to a maximum 5% withholding tax rate. However, Article 11 (3) of the Convention provides for a withholding tax rate reduced to nil respectively for debts arising from the sale on credit of equipment, merchandise or services and for payments by or to states, local authorities or financial institutions.
Given the interest withholding tax rate of 15% applied by Seychelles domestically, the reduced withholding tax of 0% on interest payments notably made to banks is particularly beneficial4.
For interest paid by a Luxembourg entity to a Seychelles entity, these low rates under the Convention do not bring any added value since, based on Luxembourg domestic tax law, there is no withholding tax on interest.
The Convention5 provides for a withholding tax rate on all types of royalties of 5%. This includes films or tapes used for radio or television broadcasting and for information linked to knowledge, industrial, commercial or scientific equipment or any experience or skill which is a broader definition compared to the Organisation for Economic Co-operation and Development ("OECD") Model.
For royalties paid by a Luxembourg entity to a Seychelles entity, this low rate under the Convention does not bring any added value since, based on Luxembourg domestic tax law, there is no withholding tax on royalties.
However, for Seychelles companies paying royalties to Luxembourg this rate is considerably advantageous as the domestic withholding tax rate amounts to 15%.6 This can also open new opportunities since Luxembourg is already a destination of choice for Intellectual Property due to an attractive legal, regulatory and fiscal environment (i.e., Luxembourg domestic intellectual property right regime).
Capital gains 7
The Convention did not reproduce the standard clause of the OECD Model regarding the capital gains realised upon the disposal by the shareholders of their participation into subsidiaries.
Besides, capital gains realized upon the disposal by a shareholder of its participations into subsidiaries are subject to tax in the state in which the shareholder is resident, even if the subsidiary is landrich.
In Luxembourg, those capital gains are tax exempt8.
In Seychelles, those capital gains are subject to business tax as ordinary income.
Exchange of information
The Convention9 applies the international standard of exchange of information upon request as provided in the 2005 OECD Model.
Collective investment vehicle10
SICAVs, SICAFs and FCPs can benefit from the favourable provisions of the Convention. They are considered as both resident and beneficial owner for purposes of the Convention. This classification is a welcome milestone avoiding doubts for Luxembourg investment funds.
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1) Article 10 (2)
2) Please note that Special Business License companies are exempt from dividend withholding tax in Seychelles.
3) Article 11 (2)
4) Please note that Special Business License companies are exempt from interest withholding tax in Seychelles.
5) Article 12 (2)
6) Please note that Special Business License companies are exempt from royalty withholding tax in Seychelles.
7) Article 13
8) Article 166 of the LITL
9) Article 25
10) Article 1 of the Protocol of the Convention
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