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23 August 2018 Luxembourg-Senegal double tax treaty enters into force The Double Tax Treaty (Treaty) between Luxembourg and Senegal1 entered into force on 14 June 2018 and its provisions will apply as from 1 January 2019. With this new Treaty, Senegal becomes the fourth African country with which Luxembourg reinforces its economic relationship. This Treaty reflects the latest international standards in terms of avoidance of double non-taxation and exchange of information and fully takes into consideration the Base Erosion and Profit Shifting (BEPS) recommendations of the Organisation for Economic Co-operation and Development (OECD). In line with the recommendations of the OECD in its Report on Action 6 of the BEPS Project (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), the Preamble of the Treaty provides expressly that both States have concluded the Treaty to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the Treaty for the indirect benefit of residents of third States). Article 4 of the Treaty defines the meaning of the term "resident of a Contracting State" and is intended to solve cases of double residence (i.e., tie-breaker rule). It should be noted that the Protocol explicitly confirms that a collective investment undertaking established in one Contracting State is considered as resident of such State and as beneficial owner of the income it receives. Consequently, collective investment vehicles are entitled to claim the benefits of the Treaty. Article 5 of the Treaty defines the concept of permanent establishment, which purpose is to determine the right of a Contracting State to tax the profits of an enterprise of the other Contracting State. The wording of this article corresponds to the wording of the OECD Model Tax Convention on Income and on Capital in its 2014 edition (OECD Model Convention). It should however be noted that the Treaty deviates from the OECD Model Convention by extending the definition to a building site or construction or installation project, or any supervisory activities in connection with such site or project, provided that it exists for a period exceeding six months. The definition also covers the provision of services, including consultancy services, rendered by a company acting through its employees but only when these activities are running for the same project for a period or periods exceeding 6 months over any 12-month period. Furthermore, article 5 of the Treaty has been adapted in comparison with the OECD Model Convention by providing that an enterprise of one Contracting State has a permanent establishment in the other Contracting State when a person (other than an agent enjoying an independent status), carrying out activities for that enterprise in the other Contracting State and without having the power to conclude contracts on behalf of the enterprise, usually retains in the other Contracting State a stock of goods from which it regularly takes goods for delivery on behalf of the enterprise. A further deviation from the OECD Model Convention is foreseen by paragraph 6, according to which the concept of permanent establishment is extended to insurance companies, apart from reinsurance companies, if they collect premiums in the territory of the other Contracting State or if they insure risks incurred therein, through the intermediary of a person other than an agent having an independent status. Finally, the last paragraph of article 5 clarifies that an agent should not be considered as being independent when he acts exclusively or almost exclusively on behalf of one enterprise. According to article 7 of the Treaty and in line with the OECD Model Convention, profits of an enterprise of one Contracting State are taxable in the other Contracting State only to the extent they are attributable to a permanent establishment the enterprise has in the other Contracting State. The Treaty incorporates a provision from the United Nations Model Double Taxation Convention regarding deductibility of expenses, being that no deduction is allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. The same principle applies for computing the profits of a permanent establishment where amounts should not be taken into account if carried by the permanent establishment at the debit of the head office. The Treaty provides for a 5% withholding tax on dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State if the beneficial owner is a company (other than a partnership) which holds directly at least 20% of the capital of the company paying the dividends. In all other cases, the withholding tax rate is 15% of the gross amount of the dividends paid. The Treaty also provides for the possibility to levy a so-called "branch tax", i.e., when a company of a Contracting State has a permanent establishment in the other Contracting State, the profits derived from this permanent establishment are subject to an additional tax of 5% in this other Contracting State according to its domestic law, as explained above. An anti-abuse provision has been inserted limiting access to the Treaty when the principal objective or one of the principal objective of the taxpayer consists in taking advantage of this article for tax purposes only. The Treaty provides that interest will be taxed in the country of residence of the beneficiary. However, the interest may be subject to withholding tax in the country of origin at a rate not exceeding 10% of the gross amount of interest paid. It should be noted that the withholding tax rate of 10% only applies to the amount of interest that is arm's length. Any exceeding part would be taxable according to the domestic legislation of each Contracting State and in consideration of the other provisions of the Treaty. If Luxembourg is the paying country, the exceeding part would in principle be treated as dividend. In Senegal, interest is subject to a withholding tax of 16%, while Luxembourg does not withhold tax on interest paid, except for interest on profit-participating bonds and similar securities and on silent partnership loans. An anti-abuse provision has been inserted limiting access to the Treaty when the principal objective or one of the principal objective of the taxpayer consists in taking advantage of this article for tax purposes only. Compared to the wording of the OECD Model Convention, the Treaty extends the definition of royalties to payments received for the use, or the right to use, of industrial, commercial or scientific equipment. The Treaty provides that royalties will be subject to tax in the country of residence of the beneficiary, with however the possibility to apply a withholding tax at a rate of 6% for royalties paid by a company which is a resident of a Contracting State to a resident of the other Contracting State for the use or right to use industrial, commercial or scientific equipment. In all other cases, the withholding tax rate is 10% of the gross amount of the royalties paid. In principle, Luxembourg does not levy withholding tax on royalties under domestic law.2 However, interest paid from Senegal is subject to a withholding tax of 20%. An anti-abuse provision has been inserted limiting access to the Treaty when the principal objective or one of the principal objective of the taxpayer consists in taking advantage of this article for tax purposes only. Compared to the wording of the OECD Model Convention, the definition of capital gains is extended to payments received from the sale of movable property belonging to a fixed base that a resident of a Contracting State has in the other Contracting State to pursue an independent profession. The Treaty contains a "real estate-rich" clause according to which capital gains derived from the alienation of shares in a company deriving more than 50% of their value directly from immovable property shall be taxed in the State where the immovable property is situated. However, the aforementioned clause does not apply to capital gains derived from the alienation of shares: (a) of a company listed on a recognized stock exchange of one of the Contracting States, (b) within the framework of a reorganization, or (c) if the immovable property from which the shares derive their value is an asset (such as a mine or a hotel) in which the activities of the enterprise are carried on. Finally, in addition to the wording of the OECD Model Convention, capital gains, other than those mentioned previously, derived from the alienation of shares representing a participation of more than 50% in a company which is a resident of a Contracting State are taxable in that State but the tax so charged shall not exceed 25% of the gains. It should be noted that, according to article 14 of the Treaty, the right to tax income from self-employed activities is not only based on the criterion of the existence of a fixed base, but also on a criterion linked to the duration. The Contracting State of the source is thus given the right to tax such income, even in absence of a fixed base, if the stay in this other Contracting State is equal or superior to a total duration of 183 days starting or ending during the taxable year considered. In such a case, only the part of income derived from the activity performed in the other Contracting State should be taxable there. As a general rule, Luxembourg has opted for the exemption method to avoid a double taxation. Consequently, where a Luxembourg resident derives income or owns capital that may be taxed in Senegal, Luxembourg will exempt such income or capital, but will, in order to calculate the amount of tax on the remaining income or capital, apply the same rates of tax as if the income or capital had not been exempted (clause of progressiveness). As regards specifically dividends, interest, royalties, capital gains derived from the alienation of shares in a real estate-rich company and those derived from the alienation of shares representing a participation of more than 50% in a company which is a resident of Senegal, as well as income from artists and sportsmen that may be subject to tax in Senegal, Luxembourg grants a tax credit of an amount equal to the tax paid in Senegal. The tax credit may however not exceed that part of the tax, as computed before the credit is given, which is attributable to such items of income derived from Senegal. The exemption shall however not apply to income derived or capital owned by a resident of Luxembourg where Senegal applies the provisions of the Treaty to exempt such income or capital from tax or applies a withholding tax in the case of dividends (excluding the branch tax), interest or royalties. The aim of this provision is to avoid a double non-taxation resulting from disagreements between the two Contracting States on the facts and circumstances of a specific case or on the interpretation of the Treaty provisions. Senegal has opted for a tax credit method to eliminate double taxation. The credit shall not exceed the Senegal tax, as computed before the deduction is given, which is attributable to such income. When, in accordance with any provision of the Treaty, income derived by a resident of Senegal is exempt from tax in Luxembourg, this income may be taken into account in calculating the amount of tax on the remaining income of the taxpayer. The Treaty contains non-discrimination provisions in line with article 24 of the OECD Model Convention. The Treaty provides for a mutual agreement procedure in line with article 25 of the OECD Model Convention, without however including the possibility to submit any unresolved issues arising from the case to arbitration. The Treaty contains an exchange of information provision in line with article 26 of the OECD Model Convention. The treaty contains a principal purpose test clause in accordance with Actions 6 and 15 of the BEPS Project and in line with the latest 2017 OECD Model Convention and with the multilateral instrument. Treaty benefits shall be denied if "it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that bene?t 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 bene?t in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention." This provision hence allows the Contracting States to combat all cases involving an abusive use of the Treaty.
2 A 10% withholding tax is due in Luxembourg on revenue derived by non-Luxembourg resident taxpayers from some literary, artistic and sportive activities carried out in Luxembourg.
Document ID: 2018-6003 |
