U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON :

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29–112

SENATE" !

104TH CONGRESS

2d SessionTREATY DOC.

1996

104–33

TAXATION CONVENTION WITH LUXEMBOURG

MESSAGE

FROM

THE PRESIDENT OF THE UNITED STATESTRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITEDSTATES OF AMERICA AND THE GOVERNMENT OF THE GRANDDUCHY OF LUXEMBOURG FOR THE AVOIDANCE OF DOUBLETAXATION AND THE PREVENTION OF FISCAL EVASION WITH RE-SPECT TO TAXES ON INCOME AND CAPITAL, SIGNED AT LUXEM-BOURG ON APRIL 3, 1996

SEPTEMBER 4, 1996.—Convention was read the first time and, togetherwith the accompanying papers, referred to the Committee on ForeignRelations and ordered to be printed for the use of the Senate.

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LETTER OF TRANSMITTAL

THE WHITE HOUSE, September 4, 1996.To the Senate of the United States:

I transmit herewith for Senate advice and consent to ratificationthe Convention Between the Government of the United States ofAmerica and the Government of the Grand Duchy of Luxembourgfor the Avoidance of Double Taxation and the Prevention of FiscalEvasion with Respect to Taxes on Income and Capital, signed atLuxembourg April 3, 1996. Accompanying the Convention is a re-lated exchange of notes providing clarification with respect to theapplication of the Convention in specified cases. Also transmittedfor the information of the Senate is the report of the Departmentof State with respect to the Convention.

This Convention, which is similar to tax treaties between theUnited States and other OECD nations, provides maximum ratesof tax to be applied to various types of income and protection fromdouble taxation of income. The Convention also provides for ex-change of information to prevent fiscal evasion and sets forthstandard rules to limit the benefits of the Convention to personsthat are not engaged in treaty shopping.

I recommend that the Senate give early and favorable consider-ation to this Convention and give its advice and consent to ratifica-tion.

WILLIAM J. CLINTON.

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LETTER OF SUBMITTAL

DEPARTMENT OF STATE,Washington, August 30, 1996.

The PRESIDENT,The White House.

THE PRESIDENT: I have the honor to submit to you, with a viewto its transmission to the Senate for advice and consent to ratifica-tion, the Convention Between the Government of the United Statesof America and the Government of the Grand Duchy of Luxem-bourg for the Avoidance of Double Taxation and the Prevention ofFiscal Evasion with Respect to Taxes on Income and Capital,signed at Luxembourg April 3, 1996 (‘‘the Convention’’). Also en-closed for the information of the Senate is an exchange of noteswhich provides clarification with respect to the application of theConvention in specified cases.

This Convention will replace the existing Convention betweenthe United States of America and the Grand Duchy of Luxembourgwith Respect to Taxes on Income and Property signed December18, 1962. The new Convention maintains many provisions of theexisting convention, but it also provides certain additional benefitsand updates the text to reflect current tax treaty policies.

This Convention is similar to the tax treaties between the UnitedStates and other OECD nations. It provides maximum rates of taxto be applied to various types of income, protection from doubletaxation of income, exchange of information to prevent fiscal eva-sion, and standard rules to limit the benefits of the Convention topersons that are not engaged in treaty-shopping. Like other U.S.tax conventions, this Convention provides rules specifying when in-come that arises in one of the countries and is derived by residentsof the other country may be taxed by the country in which the in-come arises (the ‘‘source’’ country).

With respect to U.S. taxes, this Convention applies to federal in-come taxes (excluding social security taxes), and federal excisetaxes imposed on premiums paid to foreign insurers other thanpremiums for reinsurance. For Luxembourg taxes, the Conventionapplies to the income tax on individuals, communal trade tax, cor-poration tax, capital tax, and tax on the fees of directors of compa-nies; it also applies to Luxembourg’s surcharges for its employmentfund on individual income and corporate taxes. Like the 1962 con-vention, however, this convention does not apply to Luxembourgcorporations that are now entitled, or subsequently become enti-tled, to special tax benefits available to companies that do not en-gage in an active trade or business, so-called 1929 holding compa-nies. These companies are exempt from Luxembourg income tax on

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the receipt of income, and their shareholders are exempt from Lux-embourg tax on the receipt of dividends from these companies.

The Convention establishes maximum rate of tax that may beimposed by the source country on specified categories of income, in-cluding dividends, interest, and royalties. In most respects, theserates are the same as in many recent U.S. treaties with OECDcountries. With one exception, the withholding rates on investmentincome are generally the same as in the present U.S.-Luxembourgtreaty. Dividends on direct investments are generally subject to taxby the source country at a rate of five percent. However, dividendspaid by companies that are residents of Luxembourg will be ex-empt from taxation by the source country if derived by a 25-percentshareholder from a company engaged in the active conduct of atrade or business in Luxembourg. Portfolio dividends remain tax-able at 15 percent. In contrast, the current convention ties the taxrate on portfolio dividends to Luxembourg’s statutory rate of tax.

Interest and royalties are generally exempt under the Conven-tion from tax by the source country as under the present treaty.In general, interest and royalties derived and beneficially owned bya resident of a Contracting State are taxable only in that State.This is not true, however, if the beneficial owner of the interest isa resident of one Contracting State and the interest arises in theother Contracting State from a permanent establishment throughwhich the interest owner carries on business or from a fixed basefrom which the owner carries on personal services. In that situa-tion, the income is to be considered either business profits or inde-pendent personal services income.

Like other U.S. tax treaties, this Convention provides the stand-ard anti-abuse rules for certain classes of investment income. Inaddition, the proposed Convention provides for the elimination ofanother potential abuse relating to the granting of U.S. treaty ben-efits in the so-called ‘‘triangular cases,’’ to third-country permanentestablishments of Luxembourg corporations that are exempt fromtax in Luxembourg by operation of Luxembourg law. Under theproposed rule, full U.S. treaty benefits will be granted in these ‘‘tri-angular cases’’ only when the U.S.-source income is subject to a sig-nificant level of tax in Luxembourg and in the country in which thepermanent establishment is located.

The taxation of capital gains under the Convention is similar tothe rule in the present treaty and recent U.S. tax treaties. Gainsfrom the sale of personal property are taxed only in the seller’sState or residence unless they are attributable to a permanent es-tablishment or fixed base in the other State.

The proposed Convention generally follows the standard rules fortaxation by one country of the business profits of a resident of theother. Each Contracting State may tax business profits of an enter-prise of the other State only when the profits are attributable toa permanent establishment located in the first state.

As with all recent U.S. treaties, this Convention permits theUnited States to tax branch operations. This is not permitted underthe present treaty. The proposed Convention also accommodates aprovision of the 1986 Tax Reform Act that attributes to a perma-nent-establishment income that is earned during the life of the per-

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manent establishment but is deferred and not received until afterthe permanent establishment no longer exists.

Consistent with U.S. treaty policy, the proposed Convention per-mits only the country of residence to tax profits from internationalcarriage by ships or airplanes and income from the use or rentalof ships, aircraft, or containers. Under the present treaty, only theState where the ship or aircraft is registered may tax the incomederived from the operation of the ships or aircraft.

The taxation of income from the performance of personal servicesunder the proposed Convention is essentially the same as thatunder other recent U.S. treaties with OECD countries. Such incomeis taxable only the State of the person’s residence unless the personhas a fixed base regularly available in the other Contracting State.Unlike many U.S. treaties, however, the proposed Convention al-lows the resident state to tax the income derived from employmentabroad a ship or aircraft operated in international traffic if the en-terprise’s Contracting State fails to tax the income.

The proposed Convention contains standard rules making itsbenefits unavailable to persons engaged in treaty-shopping. Thecurrent treaty contains no such anti-treaty-shopping rules. Underthe proposed Convention, a company will be entitled to benefits ifit is a ‘‘qualified resident’’ of a Contracting State as defined in theConvention.

The proposed Convention contains a variation on certain deriva-tive benefits provisions contained in recent treaties between theUnited States and the member states of the European Union. Theproposed Convention allows subsidiaries of publicly-traded compa-nies to obtain benefits if seven or fewer residents of a state thatis a member of the European Union or a party to the North Amer-ican Free Trade Agreement own at least 95 percent of the companyand the other state has a comprehensive income tax conventionwith the Contracting State. The treaty does not establish a mini-mum threshold for Luxembourg ownership.

The proposed Convention also contains the standard rules nec-essary for administering the Convention, including rules for theresolution of disputes under the Convention and for exchange of in-formation. Unlike the current convention, the proposed Conventioncontains a provision dealing with items of income that are not dealtwith specifically in other articles. Such a provision is standard inour modern treaties.

The Convention authorizes the General Accounting Office andthe Tax-Writing Committees of Congress to obtain access to certaintax information exchanged under the Convention for use in theiroversight of the administration of U.S. tax laws and treaties.

This Convention is subject to ratification. It will enter into forceon the day that the instruments of ratification are exchanged. Itwill have effect with respect to taxes withheld by the source coun-try for payments made or credited on or after the first day of Janu-ary following entry into force and in other cases for taxable yearsbeginning on or after the first day of January following the dateon which the Convention enters into force. When the present con-vention affords a more favorable result for a taxpayer than the pro-posed Convention, the taxpayer may elect to continue to apply the

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provisions of the present convention, in its entirety, for one addi-tional year.

This Convention will remain in force indefinitely unless termi-nated by one of the Contracting States. Either State may terminatethe Convention by giving at least six months of prior noticethrough diplomatic channels.

An exchange of notes accompanies the Convention and is pro-vided for the information of the Senate. This exchange of notesclarifies the application of the Convention in specified cases. Forexample, the notes specify that certain information pertaining to fi-nancial institutions may be obtained and provided to certain U.S.authorities only in accordance with the terms of the Treaty Be-tween the United States and Luxembourg on Mutual Legal Assist-ance in Criminal Matters. That treaty, which sets forth the scopeof that obligation, is expected to be signed shortly and submittedto the Senate for its advice and consent to ratification.

A technical memorandum explaining in detail the provisions ofthe Convention will be prepared by the Department of the Treas-ury and will be submitted separately to the Senate Committee onForeign Relations.

The Department of the Treasury and the Department of State co-operated in the negotiation of the Convention. It has the full ap-proval of both Departments.

Respectfully submitted,LYNN E. DAVIS.

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