[Senate Treaty Document 104-33]
[From the U.S. Government Publishing Office]
104th Congress Treaty Doc.
SENATE
2d Session 104-33
_______________________________________________________________________
TAXATION CONVENTION WITH LUXEMBOURG
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE GRAND DUCHY OF LUXEMBOURG FOR THE AVOIDANCE OF
DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME AND CAPITAL, SIGNED AT LUXEMBOURG ON APRIL 3, 1996
September 4, 1996.--Convention was read the first time and, together
with the accompanying papers, referred to the Committee on Foreign
Relations and ordered to be printed for the use of the Senate.
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
ratification the Convention Between the Government of the
United States of America and the Government of the Grand Duchy
of Luxembourg for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed at Luxembourg April 3, 1996. Accompanying
the Convention is a related exchange of notes providing
clarification with respect to the application of the Convention
in specified cases. Also transmitted for the information of the
Senate is the report of the Department of State with respect to
the Convention.
This Convention, which is similar to tax treaties between
the United States and other OECD nations, provides maximum
rates of tax to be applied to various types of income and
protection from double taxation of income. The Convention also
provides for exchange of information to prevent fiscal evasion
and sets forth standard rules to limit the benefits of the
Convention to persons that are not engaged in treaty shopping.
I recommend that the Senate give early and favorable
consideration to this Convention and give its advice and
consent to ratification.
William J. Clinton.
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
view to its transmission to the Senate for advice and consent
to ratification, the Convention Between the Government of the
United States of America and the Government of the Grand Duchy
of Luxembourg for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed at Luxembourg April 3, 1996 (``the
Convention''). Also enclosed for the information of the Senate
is an exchange of notes which provides clarification with
respect to the application of the Convention in specified
cases.
This Convention will replace the existing Convention
between the United States of America and the Grand Duchy of
Luxembourg with Respect to Taxes on Income and Property signed
December 18, 1962. The new Convention maintains many provisions
of the existing convention, but it also provides certain
additional benefits and updates the text to reflect current tax
treaty policies.
This Convention is similar to the tax treaties between the
United States and other OECD nations. It provides maximum rates
of tax to be applied to various types of income, protection
from double taxation of income, exchange of information to
prevent fiscal evasion, and standard rules to limit the
benefits of the Convention to persons that are not engaged in
treaty-shopping. Like other U.S. tax conventions, this
Convention provides rules specifying when income that arises in
one of the countries and is derived by residents of the other
country may be taxed by the country in which the income arises
(the ``source'' country).
With respect to U.S. taxes, this Convention applies to
federal income taxes (excluding social security taxes), and
federal excise taxes imposed on premiums paid to foreign
insurers other than premiums for reinsurance. For Luxembourg
taxes, the Convention applies to the income tax on individuals,
communal trade tax, corporation tax, capital tax, and tax on
the fees of directors of companies; it also applies to
Luxembourg's surcharges for its employment fund on individual
income and corporate taxes. Like the 1962 convention, however,
this convention does not apply to Luxembourg corporations that
are now entitled, or subsequently become entitled, to special
tax benefits available to companies that do not engage in an
active trade or business, so-called 1929 holding companies.
These companies are exempt from Luxembourg income tax on the
receipt of income, and their shareholders are exempt from
Luxembourg tax on the receipt of dividends from these
companies.
The Convention establishes maximum rate of tax that may be
imposed by the source country on specified categories of
income, including dividends, interest, and royalties. In most
respects, these rates are the same as in many recent U.S.
treaties with OECD countries. With one exception, the
withholding rates on investment income are generally the same
as in the present U.S.-Luxembourg treaty. Dividends on direct
investments are generally subject to tax by the source country
at a rate of five percent. However, dividends paid by companies
that are residents of Luxembourg will be exempt from taxation
by the source country if derived by a 25-percent shareholder
from a company engaged in the active conduct of a trade or
business in Luxembourg. Portfolio dividends remain taxable at
15 percent. In contrast, the current convention ties the tax
rate on portfolio dividends to Luxembourg's statutory rate of
tax.
Interest and royalties are generally exempt under the
Convention from tax by the source country as under the present
treaty. In general, interest and royalties derived and
beneficially owned by a resident of a Contracting State are
taxable only in that State. This is not true, however, if the
beneficial owner of the interest is a resident of one
Contracting State and the interest arises in the other
Contracting State from a permanent establishment through which
the interest owner carries on business or from a fixed base
from which the owner carries on personal services. In that
situation, the income is to be considered either business
profits or independent personal services income.
Like other U.S. tax treaties, this Convention provides the
standard anti-abuse rules for certain classes of investment
income. In addition, the proposed Convention provides for the
elimination of another potential abuse relating to the granting
of U.S. treaty benefits in the so-called ``triangular cases,''
to third-country permanent establishments of Luxembourg
corporations that are exempt from tax in Luxembourg by
operation of Luxembourg law. Under the proposed rule, full U.S.
treaty benefits will be granted in these ``triangular cases''
only when the U.S.-source income is subject to a significant
level of tax in Luxembourg and in the country in which the
permanent establishment is located.
The taxation of capital gains under the Convention is
similar to the rule in the present treaty and recent U.S. tax
treaties. Gains from the sale of personal property are taxed
only in the seller's State or residence unless they are
attributable to a permanent establishment or fixed base in the
other State.
The proposed Convention generally follows the standard
rules for taxation by one country of the business profits of a
resident of the other. Each Contracting State may tax business
profits of an enterprise of the other State only when the
profits are attributable to a permanent establishment located
in the first state.
As with all recent U.S. treaties, this Convention permits
the United States to tax branch operations. This is not
permitted under the present treaty. The proposed Convention
also accommodates a provision of the 1986 Tax Reform Act that
attributes to a permanent-establishment income that is earned
during the life of the permanent establishment but is deferred
and not received until after the permanent establishment no
longer exists.
Consistent with U.S. treaty policy, the proposed Convention
permits only the country of residence to tax profits from
international carriage by ships or airplanes and income from
the use or rental of ships, aircraft, or containers. Under the
present treaty, only the State where the ship or aircraft is
registered may tax the income derived from the operation of the
ships or aircraft.
The taxation of income from the performance of personal
services under the proposed Convention is essentially the same
as that under other recent U.S. treaties with OECD countries.
Such income is taxable only the State of the person's residence
unless the person has a fixed base regularly available in the
other Contracting State. Unlike many U.S. treaties, however,
the proposed Convention allows the resident state to tax the
income derived from employment abroad a ship or aircraft
operated in international traffic if the enterprise's
Contracting State fails to tax the income.
The proposed Convention contains standard rules making its
benefits unavailable to persons engaged in treaty-shopping. The
current treaty contains no such anti-treaty-shopping rules.
Under the proposed Convention, a company will be entitled to
benefits if it is a ``qualified resident'' of a Contracting
State as defined in the Convention.
The proposed Convention contains a variation on certain
derivative benefits provisions contained in recent treaties
between the United States and the member states of the European
Union. The proposed Convention allows subsidiaries of publicly-
traded companies to obtain benefits if seven or fewer residents
of a state that is a member of the European Union or a party to
the North American Free Trade Agreement own at least 95 percent
of the company and the other state has a comprehensive income
tax convention with the Contracting State. The treaty does not
establish a minimum threshold for Luxembourg ownership.
The proposed Convention also contains the standard rules
necessary for administering the Convention, including rules for
the resolution of disputes under the Convention and for
exchange of information. Unlike the current convention, the
proposed Convention contains a provision dealing with items of
income that are not dealt with specifically in other articles.
Such a provision is standard in our modern treaties.
The Convention authorizes the General Accounting Office and
the Tax-Writing Committees of Congress to obtain access to
certain tax information exchanged under the Convention for use
in their oversight of the administration of U.S. tax laws and
treaties.
This Convention is subject to ratification. It will enter
into force on the day that the instruments of ratification are
exchanged. It will have effect with respect to taxes withheld
by the source country for payments made or credited on or after
the first day of January following entry into force and in
other cases for taxable years beginning on or after the first
day of January following the date on which the Convention
enters into force. When the present convention affords a more
favorable result for a taxpayer than the proposed Convention,
the taxpayer may elect to continue to apply the provisions of
the present convention, in its entirety, for one additional
year.
This Convention will remain in force indefinitely unless
terminated by one of the Contracting States. Either State may
terminate the Convention by giving at least six months of prior
notice through diplomatic channels.
An exchange of notes accompanies the Convention and is
provided for the information of the Senate. This exchange of
notes clarifies the application of the Convention in specified
cases. For example, the notes specify that certain information
pertaining to financial institutions may be obtained and
provided to certain U.S. authorities only in accordance with
the terms of the Treaty Between the United States and
Luxembourg on Mutual Legal Assistance in Criminal Matters. That
treaty, which sets forth the scope of that obligation, is
expected to be signed shortly and submitted to the Senate for
its advice and consent to ratification.
A technical memorandum explaining in detail the provisions
of the Convention will be prepared by the Department of the
Treasury and will be submitted separately to the Senate
Committee on Foreign Relations.
The Department of the Treasury and the Department of State
cooperated in the negotiation of the Convention. It has the
full approval of both Departments.
Respectfully submitted,
Lynn E. Davis.