Luxembourg, Hong Kong – Taxation

Dividends

This treaty stipulates a maximum 10% withholding tax (WHT) rate applicable to dividends paid by a company located in one country to shareholders in another. This WHT rate drops to zero if the recipient is a company owning at least 10% of the distributive company's capital (or if the acquisition cost exceeds €1.2 million in the dividend-paying company).

Interest

Tax on interest accrued in one party to the transaction and paid to a resident of the other contracting state is levied solely in the latter state's territory. Hence, the source country does not levy WHT on interest income, and taxation occurs exclusively in the beneficiary's country of residence.

Royalties

A maximum royalty tax rate of 3% is established. Currently, this represents the lowest royalty tax rate available in treaties signed by Hong Kong.

China-Luxemburg Tax Agreement

Dividends

Under this agreement, a 5% tax rate applies if the beneficial owner is a company holding at least 25% of the distributor's capital. Otherwise, the tax rate rises to 10%.

Interest

Interest arising in one party to the transaction and remitted to a resident of the other contracting state is subject to a maximum 10% tax rate. However, Luxembourg does not impose a tax on interest earned by companies or individuals who are non-European Union residents and some other countries.

Royalties

The highest royalty tax rate stands at 10%.

Luxembourg Tax System

Business Income

The standard corporate tax rate is 29.22%. It is expected that the standard tax rate will eventually be lowered to 25%, although it remains unclear whether this proposal will be accepted amid the ongoing financial crisis.

Dividend Tax and Profit Tax

Dividends and profits derived from the sale of shares in a Luxembourg-based Soparfi company will be exempt from taxation in Luxembourg. Otherwise, 50% of dividends will remain taxable.

Interest

Interest income will be taxed at the standard corporate tax rate.

Royalties

Income from intellectual property will be tax-free for 80% of royalties for six years. Other royalty income will be taxed at the standard rate.

Liquidation Procedure

Profits resulting from liquidation of a Luxembourg company will not be subject to withholding tax (WHT).

Repatriation Scheme (for dividends)

European Union

Luxembourg implemented a directive on parent-subsidiary relationships, eliminating dividend taxes for shareholders who participate in EU-based companies.

Canada

If the ultimate beneficiary is a Canadian resident, the tax rate should not exceed 5%, provided that the Canadian company controls at least 10% of voting shares in the Luxembourg company paying dividends. A 0% tax rate applies if the Canadian beneficiary owns at least 25% of the voting shares in the Luxembourg company and has done so for at least two preceding years before receiving dividends. Only dividends distributed from shares held for two years are exempt from taxation.

These conditions apply only if the distributed dividends are obtained through active participation in the Luxembourg business and are exempt from taxation in Canada.

United States

Similar conditions apply to the United States as outlined under the Canada section regarding duration of share ownership, control over management, and active involvement in the Luxembourg company’s business. This reduces the tax rate to 5% in accordance with the U.S.-Luxembourg tax treaty.