Tax Agreement between Taiwan and Luxembourg
The Agreement between Luxembourg and Taiwan dated 19 December 2011 (“the Agreement”) and its protocol (“the Protocol”) were ratified by both Luxembourg and Taiwan. The exchange of ratification instruments was completed on 12 July 2014 and the Agreement came into force on 25 July 2014 (Mémorial 2014, A, n° 123, p. 1770) with an effective date on 1 January 2015.
The key points of the Agreement for corporates are as follows:
In addition to Article 4 which strictly follows the principles of the OECD Model Convention, the protocol to the Agreement provides that a collective investment vehicle will be considered as both resident for treaty purposes and the beneficial owner of the income (especially dividends, interest) it receives if it is treated as a “body corporate for tax purposes” in its territory of residence. This provision should be beneficial for the Luxembourg investment fund industry, in particular, for SICAVs/SICAFs/SV that should thus benefit from the reduced rates under the Agreement.
The standard rate applicable to the dividend withholding tax amounts to 10%.
However, where the beneficial owner is a collective investment vehicle and treated as a body corporate for tax purposes in the other country, the Agreement1 provides for a withholding tax rate of 15%.
For a Luxembourg subsidiary paying dividends to its Taiwanese parent, the reduced rate under the Agreement has a limited impact since withholding tax rates on dividends paid to Taiwanese companies can typically be reduced to 0% provided the conditions for the Luxembourg participation exemption regime (as provided under Article 147 of Luxembourg Income Tax Law - “LITL”) are met. However, the concluded Agreement will have an impact from a Luxembourg tax perspective since without it we would not be able to apply dividend withholding tax exemption of Article 147 LITL. The Taiwanese parent would be taxed on the foreign dividend income at 17%.
Based on Taiwanese domestic tax law, a dividend paid by a Taiwanese subsidiary to its Luxembourg parent company is subject to 20% withholding tax. Therefore, the Agreement might be beneficial in such a case reducing the withholding tax to 10%. Moreover, the Luxembourg domestic tax law would typically exempt 100% of dividends received by Luxembourg parent from a Taiwanese subsidiary under its participation exemption regime.
The Agreement2 provides for interest payments to be generally subject to a 10% maximum withholding tax rate. This rate is increased to 15% if the beneficial owner of the interest is a collective investment vehicle and treated as a body corporate for tax purposes in the other country. The standard rate of 10% can be reduced to nil notably if the interest is paid to a political subdivision, a local authority or the Central Bank, on loans made between banks or in respect of loans granted, guaranteed or insured or a credit extended, guaranteed or insured by an approved instrumentality which aims at promoting export.
The benefits of the Agreement for interest payments made by Luxembourg companies to Taiwanese creditors are limited since interest payments are generally not subject to withholding tax in Luxembourg.
The domestic withholding tax rate applied by Taiwan on interest payment to non-residents is 20%. The reduced withholding tax rate of 10% or 15% applicable to the payments made by Taiwanese debtors to Luxembourg creditors should positively impact the development of financing structures involving Luxembourg finance companies. Also, banks might consider granting loans between their Luxembourg and/or Taiwanese subsidiaries to benefit from the 0% withholding tax rate.
The Agreement3 foresees a 10% withholding tax rate on royalties. The withholding tax reduction applies to a broad range of royalties described in the Agreement.
The impact from a Luxembourg standpoint is neutral as royalties paid by a Luxembourg company to non-residents are not subject to withholding tax under Luxembourg domestic tax law.
However, the Agreement becomes beneficial where royalties are paid by a Taiwanese company to a Luxembourg company, as the local withholding tax rate of 20% is reduced to 10%. Further, Luxembourg exempts income from royalties as well as from selling the intellectual property at 80%, together with the legal protection of the intellectual property under various international conventions making Luxembourg an attractive place to explore business opportunities.
Article 13 of the Agreement is broadly in line with the OECD Model Convention whereby:
- Gains from the alienation of immovable property are taxed in the State where immovable property is located;
- Capital gains realized upon the disposal by a shareholder of its interest in a subsidiary (or other assets not covered by the provisions of this Article) are only subject to tax in the State where the seller is resident.
Consequently, capital gains realized by a Luxembourg shareholder in a Taiwanese subsidiary should be tax exempt in Taiwan based on the Agreement and in Luxembourg under the participation exemption regime. It is also worth highlighting that the commonly observed paragraph on allocating the capital gains taxing right for the alienation of shares in a land rich company is absent from the Agreement.
Capital gains realized by a Taiwanese shareholder in a Luxembourg subsidiary should be tax exempt in Luxembourg according to the Agreement and taxable in Taiwan as part of the business income at 17%.
Exchange of information5
The Agreement applies the international standard of exchange of information upon request as provided in the 2010 OECD Model Agreement. In addition, the Protocol details the requirements for the information requests (e.g. identity of the person, tax purpose, etc.).
Limitation on benefits6
The Agreement includes a provision stating that benefits will not be granted if it is established that the main purpose or one of the main purposes of a resident’s conduct of operations was to obtain the application of the Agreement. In principle, this general anti-abuse rule is not applied without prior consultation between the competent authorities of both territories.
This Agreement is a significant step in the development of business relationships between Taiwan and Luxembourg. Taiwanese investors will now be able to use Luxembourg companies for investments throughout the world and investors from any country can now invest in Taiwan through a wide range of Luxembourg investment vehicles.
Furthermore, the Agreement strengthens the Luxembourg treaty network with Asian countries. Before the ratification of this treaty, the Netherlands were nearly the only option for Taiwanese inbound and outbound investments. The present Agreement is very similar to the Agreement concluded between the Netherlands and Taiwan but together with the other structural opportunities Luxembourg has to offer, it clearly helps put Luxembourg firmly on the map for new interesting business opportunities.
Funds should bear in mind that to benefit from the reduced withholding tax rates under the Agreement, they may need to appoint a tax representative in Taiwan to obtain a relief from withholding tax upfront or reclaim excess withholding tax paid. KPMG has extensive experience in this respect.
For further information, please do not hesitate to contact us.
1 Article 10 (2)
2 Article 11 (2)
3 Article 12 (2)
4 Article 13
5 Article 26
6 Article 27