On 2 June 2008, India and Luxembourg signed a tax treaty and amending protocol, but the treaty is not yet in force. The treaty is expected to enhance investment opportunities and the flow of capital, technology and persons between the two countries and prevent obstacles in providing mutual cooperation. The following are the salient features of the treaty:
Taxes covered – With respect to India, the treaty will cover income tax and wealth tax (including surcharges). In Luxembourg, the treaty will cover corporation tax, the municipal business tax and income tax on individuals.
Person – The term “person” is defined to include an individual, a company, a body of persons and any other entity that is treated as a taxable unit under domestic tax law.
Resident – To qualify as a resident of a Contracting State, a person must be “liable to tax” therein by reason of domicile, residence, place of management or other similar criterion; a “resident” also includes the state and any political subdivision or local authority thereof. “Resident” does not include a person who is liable to tax in that state only in respect of income from sources in that state or capital situated therein. In case of dual residence, tiebreaker rules will be used to determine tax residence.
Business profits – Business profits of an entity will be taxed in the country of its residence unless the entity carries on its business in the other country through a permanent establishment (PE). The term “PE” includes, inter alia, a place of management, branch, sales outlet or a warehouse in relation to a person providing storage facilities for others.
A PE also may be created by:
• A building site or construction, installation or assembly project or connected supervisory activities that exist for more than nine months;
• Furnishing of services through employees or other personnel for a period aggregating more than 183 days within any 12-month period;
• Specified activities carried out by certain dependent persons; or
• An insurance enterprise (except in regard to re-insurance) if it collects premiums in the territory of the other state or insures risks situated therein through certain dependent persons.
Dividends, interest, royalties and technical services fees – The treaty provides for the taxation of dividends, interest, royalties and technical services fees both in the residence and the source country. However, the rate of tax in the source country may not exceed 10% of the gross amount where the beneficial owner of the payments is a resident of the other Contracting State. Technical service fees are defined broadly under the treaty to include consideration for managerial or technical or consulting services, including the provision of services of technical or other personnel.
Capital gains – Capital gains derived from the alienation of shares of a company will be taxable in the country where the company is a resident.
Avoidance of double taxation – For Indian residents, double taxation will be avoided by the credit method (i.e. tax paid in Luxembourg may be credited against Indian tax liability on such income). For Luxembourg residents, the credit method will be available only where the income has been taxed in India as a dividend, interest, royalty or fees for technical services and income derived by artists and sportspersons. The credit will be available to the extent of Luxembourg tax on such income. In all other cases, double taxation will be eliminated by the exemption method, whereby income taxed in India will be excluded from taxable income (but such income can be included for determining the applicable rate).
Resolution of disputes – The treaty includes a mutual agreement procedure for resolution of disputes relating to taxability under the treaty, interpretation of the treaty and elimination of double taxation in cases not provided for in the treaty.
Limitation of benefits (LOB) – There is an LOB provision to prevent abuse of treaty benefits. Notably, the treaty will not affect the application of domestic provisions to prevent tax evasion. Under the LOB, treaty benefits will be denied in the following cases:
· If the main purpose, or one of the main purposes, for establishing the entity was to obtain benefits under the treaty that otherwise would not have been available;
• If a legal entity does not have bona fide business activity.
Miscellaneous – The treaty provides for an exchange of information for cases under investigation in either of the two countries. It also provides for assistance in the collection of revenue claims, including interest and penalties.
The benefits under the treaty will not apply to certain companies (including holding companies) that enjoy special tax treatment under Luxembourg law. Thus, treaty benefits would not apply to income derived by a resident of India from such companies or to shares or other rights in the capital of such companies owned by such person.
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