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Taiwan-Luxemburg Tax Treaty to Take Effect from 1 January 2015
In the aim of avoiding double taxation, improving the investment environment for Taiwan, as well as increasing the attractiveness of foreign investment into Taiwan, the Ministry of Finance in recent years has focused on entering into tax treaties with other jurisdictions. After years of effort, Taiwan and Luxemburg entered into a tax treaty on July 25th 2014, which becomes the 27th comprehensive income tax treaty that the Taiwan government has entered. Pursuant to Article 29 of the Taiwan-LuxemburgTaxTreaty(the "Treaty"), the Treaty shall have effect: (a) in respect of taxes withheld at source, to income on or after 1 January 2015; and (b) in respect of other taxes on income, and taxes on capital, to taxes chargeable for any taxable year beginning on or after 1 January 2015.
The Treaty consists of 30 articles. The tax relieves under the Treaty which impact both countries' economy, trade, investment and technology include those on business profits,dividends, interests, royaltiesandincome from securities transactions. Since theTreaty was based onthe OECDandUN Model Tax Conventions, the tax relieves provided under the Treaty are generally the same as those under the other tax treaties that Taiwan had signed. In short, starting from 1 January 2015, a Luxemburg tax resident that generates (i) income in Taiwan that is subject to withholding tax at source, such as dividends, interests and royalties, a reduced withholding tax rate of 10% will apply; and (ii) income in Taiwan that falls into the category of business profit, tax exemption will apply, provided that the Luxemburg tax resident has no permanent establishment in Taiwan. If it has a permanent establishment in Taiwan, it will be subject to Taiwan income tax for the portion of the income that is attributable to the permanent establishment.
Furthermore, because Luxemburg is the financial services center of Europe and that the majority of offshore funds in Taiwan are registered in Luxemburg, the Treaty sets forth the following special provisions on the tax treatment of dividends, interest income and income from securities transactions that are generated by Luxemburg-registered funds:
1. Collective Investment Vehicles ("CIVs") registered in Luxemburg are either a conduit or a company.
2. Company-type CIVs are deemed as Luxemburg residents and are the beneficial owner of the income that such CIVs obtained. Accordingly, they can directly apply the benefits under the Treaty in their name, including the exemption from alternative minimum tax on the capital gains generated from securities transactions However, for the income that is subject to withholding tax, they can only apply a reduced withholding tax rate of 15% (instead of 10%).
3. Conduit-type CIVs are not subject to income tax in Luxemburg, and thus only their beneficiaries who are Luxemburg tax residents ("Lux Beneficiaries") are eligible for the benefits provided under the Treaty. These CIVs may submit supporting documents (as prescribed under Article 15 (6) of the Regulations Governing the Application of Tax Treaties) evidencing the ratio of Lux Beneficiaries to total beneficiaries, and apply the reduced withholding tax rate of 10% on the portion of the income that belongs to the Lux Beneficiaries, which is determined based on the aforementioned ratio. Moreover, a portion of their income generated from securities transactions, which is determined based on said ratio, may also qualify for tax exemption under the Treaty.