Luxembourg Tax Alert 2022-06

New UK-Luxembourg double tax treaty signed on 7 June 2022

New UK-Luxembourg double tax treaty signed on 7 June 2022

On 7 June 2022, the new Luxembourg - United Kingdom (“UK”) Income and Capital Tax Treaty (the “DTT”) was signed in London.

The DTT will replace the currently applicable Income and Capital Tax Treaty – see below for the entry into force.

The text of the DTT can be accessed here.

The main new provisions of the DTT are summarized hereafter.

Tax residence (art. 4 and protocol)

The new DTT defines  the term “resident of a Contracting State”  as any person who, under the laws of that State, is liable to tax therein by reason of its domicile, residence, place of management, place of incorporation, place of registered office or any other criterion of a similar nature. It should be noted that the current treaty does not refer to the place of incorporation or registered office.

Moreover, it should be noted that recognized pension funds are now explicitly considered to be tax residents for the purpose of the new DTT.

Luxembourg collective investment vehicles (“CIVs”), such as Luxembourg UCITS, UCIs part II, SIFs and RAIFs, are considered  to be Luxembourg residents individuals if: i) they are treated as body corporates for Luxembourg tax purposes and, ii) to the extent they are held by so-called “equivalent beneficiaries”. However, if the CIV is a UCITS, or its unitholders are composed of at least 75% of “equivalent beneficiaries”, the CIV is considered as a de facto resident of Luxembourg and the beneficial owner of the income it receives.

A person is considered to be an “equivalent beneficiary” if it is (a) a resident of Luxembourg, or (b) a resident of any other jurisdiction with which the UK has arrangements that provide for the exchange of information and who would be entitled under an income tax treaty with the UK to a tax rate at least as low as the rate claimed under the DTT by the CIV, when receiving the particular item of income for which the DTT benefits can be claimed

Where a person (other than an individual) is considered to be a resident of both the UK and Luxembourg based on the provisions of the DTT, the place of effective management is no longer considered to be the definitive tie-breaker rule. Instead, the new DTT provides that the competent tax authorities shall determine by mutual agreement where this person is considered to be a tax resident, having regard to its place of effective management, the place where it is incorporated or constituted and any other relevant factors. In case no agreement is reached, the person should not be entitled to the benefit of the DTT, except if provided otherwise by the competent tax authorities.

It should be noted that taxpayers benefiting from the tie-breaker rule under the current treaty will not be affected by the mutual agreement procedure prescribed by the new DTT, provided that the material facts remain unchanged. 

Transfer pricing/associated enterprises (art. 9)

Where the competent tax authorities of a Contracting State apply an additional tax surcharge to a transaction between associated enterprises which they deem to not be in accordance with the arm’s length principle, the other Contracting State should make a corresponding adjustment.

The competent tax authorities may consult each other if needed.

Dividends (art. 10)

The new DTT provides that dividend distributions from a company resident in one Contracting State, to a beneficial owner resident in the other Contracting State shall not be subject to withholding tax (“WHT”) in the source state. Whereas,  the current treaty provides for a 5% WHT at source subject to specific conditions.

Yet, it should be noted that the new WHT exemption does not apply where dividends are paid out of income (including gains) derived directly or indirectly from immovable property, by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax. In such a case, the dividends should be subject to a 15% WHT.
Yet again, the WHT exemption  can be relied on where the investment vehicle distributes the dividend to a recognized pension fund and the latter is considered to be the beneficial owner.

Royalties (art. 12)

Under the new DTT, the state of residence of the beneficial owner has the exclusive right to tax royalty payments. Whereas, the current treaty permits the source state to levy a 5% WHT on royalty payments. 

Capital gains / Land-rich clause (art. 13)

The new DTT  introduces a land-rich clause, pursuant to which gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, deriving more than 50% of their value directly or indirectly from immovable property, may be taxed in the State where the immovable property is located.

Entitlement to benefits/Principal purpose test (art. 28)

The principal purpose test provided by the Multilateral Instrument (MLI) has been formally incorporated in the text of the new DTT (among other changes made by the MLI to the current treaty). As a result of which, a benefit under the DTT should be denied if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTT.

Luxembourg CFC rules (protocol)

The new DTT will not prevent Luxembourg from applying CFC rules under article 164ter of Luxembourg income tax law. 

Entry into force (art. 29) and next steps

The new DTT will enter into force once both countries have ratified the text  and exchanged the ratification instruments. The next step will be for the Luxembourg government to file a bill approving the DTT with the Luxembourg parliament.

Provided that  the ratification process in both countries is concluded in 2022, the DTT will enter into force in 2022, but the DTT will only become applicable at a later stage, the exact date of effect will depend on the contracting states and type of tax concerned:

In the United Kingdom

  • in respect of WHT, to income derived on or after 1 January of the calendar year next following the year in which this Convention enters into force;
  •  in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6 April of the calendar year next following the year in which this Convention enters into force;
  • in respect of corporation tax, for any financial year beginning on or after 1 April of the calendar year next following the year in which this Convention enters into force;


In Luxembourg:

  • in respect of WHT, to income derived on or after 1 January of the calendar year next following the year in which the Convention enters into force;
  • in respect of other taxes on income, and taxes on capital, to taxes chargeable for any taxable year beginning on or after 1 January of the calendar year next following the year in which the Convention enters into force.


An exception is however foreseen for provisions on Mutual Agreement Procedures and Exchange of information, that shall have effect from the date of entry into force of the DTT, without regard to the taxable period to which the matter relates.

For any question regarding the scope of the DTT and how it may impact your business, please do not hesitate to contact us.