24 June 2011
ATOZ NEWS: Tax, ATOZ and Taxand Intelligence | June 2011
by: The Atoz Team
Greetings!
Welcome to the third edition of ATOZ News of 2011.
Midway in the year and in preparation for the summer holidays, we find the business environment busy and productive, but perhaps not as hectic as a few months back. On the enterprise side, we still see a significant increase in transaction volume from the PE and PERE market sectors. In the same light, we hear the Asian dragon’s roar louder, signifying the rise of the in- and out- bound investors’ market appetite. We expect to hear and see much more of it the second half of the year.
The numerous tax and regulatory changes in planning and execution, a number of which are outlined below, also continue to keep us, our colleagues and clients in constant state of anxiety. As usual, while we receive clarification on some of them, like the taxation of the German cross-border workers, there are others that come up and leave many questions unanswered, such as the VAT exemption for certain services related to sale of shares of real estate property companies. Business as usual, one might say.
We hope that you have had a productive first half of the year as well and are preparing for well-deserved time off during the summer months. Enjoy!
Regards,
Nicolas Cuisset, Partner, Corporate Implementation Services, ATOZ
SUMMARY
An interesting, but worrying case for the real estate sector: back in April of this year, the Dutch Supreme Court requested a preliminary ruling from the European Court of Justice (ECJ) about its interpretation of the VAT exemption applicable to transactions including negotiation in shares and other securities.
This specific case involves a company, which provided advisory and management services in the real estate sector and acted as a negotiator in a number of sales of real estate properties. The transfer of the properties occurred by way of the sale of the shares of the companies owning the asset. These services were considered as VAT exempt by the service provider by virtue of the VAT exemption applicable to transaction in shares.
The Dutch Authorities, however argued that these services had to be considered as services connected to real estate and therefore had to be subject to VAT where the property is located (i.e. in the Netherlands). The main argument of the Dutch Authorities is that the service provider acted as a real estate broker and intended to find a purchaser paying the best price for the real estate. The fact that the deal was closed under the form of a sale of shares does not influence the nature of the services provided by the real estate broker.
Considering this, the Dutch Supreme Court requested a preliminary ruling from the ECJ on the following questions:
- Does Article 13B(d)(5) of the Sixth VAT Directive have to be interpreted that it includes activities carried out by a taxpayer, which concern the (indirect) transfer of real estate owned by companies, merely because the activities were aimed at and resulted in the transfer of shares of the companies concerned?
- Does the exception concerning the exemption of Art. 13(B)(d)(5) of that Directive also apply if a Member State has used the option provided for in Art. 5(3)(c) of the Sixth VAT Directive to classify certificates and shares entitling to the ownership or use of real estate as tangible assets?
- If the preceding question is answered in the affirmative, does the term certificates and shares include shares in companies, which directly or indirectly (by means of subsidiaries) own real estate, regardless whether they exploit the real estate or use it for a different company?
The decision of the ECJ could have a major impact for the real estate sector as it will determine whether certain specific services in relation to the transfer of shares of property companies must be considered VAT exempt, or as services connected to real estate and thus, subject to VAT.
Moreover, the case could open a broader debate, notably whether the VAT treatment of a given transaction is influenced not only by the nature of the transaction, but also by the underlying assets. Increasing the complexity of the already complicated VAT system is most likely not the objective of the ECJ nor of the EU Commission. However, it certainly is a judgment to keep an eye on.
For additional details, questions and comments, please contact Christophe Plainchamp at christophe.plainchamp@atoz.lu and Nicolas Devillers at nicolas.devillers@atoz.lu
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The uncertainties regarding the taxation of German cross-border workers have been clarified thanks to the mutual agreement between Luxembourg and Germany. The agreement is binding for the German and Luxembourg tax authorities and provides reliable guidelines in relation to the taxation of German cross-border workers.
- 1. Situation of German cross-border workers
German cross-border workers (i.e., German residents who are employed by a Luxembourg employer and commute to Luxembourg) pay their wage taxes in Luxembourg. That seemed to be clear for the past 50 years. That practice, however, changed in 2010 when the German tax authorities changed their application of article 10, paragraph 1 of the double tax treaty between Luxembourg and Germany (hereafter “DTT”).
Article 10 of the DTT states that “where an individual who is a resident of a Contracting State derives income in the form of salaries, wages and similar remuneration in respect of present or past employment exercised in the other State, the said income shall be taxable in the latter State.”
This means for German cross-border workers that their salary is taxable in Luxembourg if they exercise their work in Luxembourg. Based on the DTT, Germany has to exempt that salary from tax in Germany. In the past, German cross-border workers typically declared 100% of their salary income taxable in Luxembourg. This was largely accepted by the German tax administration in Trier without further evidence. This practice however recently changed. In 2010 the German tax authorities discovered a case of a German resident, who was employed in Luxembourg, however, actually worked most of the time in Germany. Based on the common practice to that date, that person declared 100% of his salary to be taxable in Luxembourg. It was that case, which lead the tax administration in Trier to change their application of article 10 paragraph 1 of the DTT.
- 2. Application by the tax administration in Trier
From the point of view of the German tax authorities, working days which a cross-border worker does not spend physically in Luxembourg, but in Germany or in a third country trigger taxation in Germany. Also, sick-leave days, holidays, days spent on trainings or lectures in Germany or third countries should also trigger taxation in Germany. According to the German tax authorities, these days have to be considered as work not exercised in Luxembourg. As a result, the taxation right with respect to the salary paid for these days should fall back to Germany according to article 10 paragraph 1 of the DTT. The reason for this should be that a German resident is subject to tax on his world wide income, unless the right to tax that income is limited by DTT. Article 10 paragraph 1 of the DTT should only limit Germany’s taxation right if the work is physically exercised in Luxembourg.
- 3. Mutual agreement between Germany and Luxembourg
Thanks to the excellent relationship between the ministers of finance Mr. Luc Frieden and Mr. Wolfgang Schäuble, Luxembourg and Germany came to a mutual agreement1 , dated May 26, 2011.. This mutual agreement is based on article 26 of the DTT and it aims to establish a consistent taxation between Germany and Luxembourg.
The mutual agreement enters into force as at 27 May 2011, and applies to all cases, for which a final tax assessment does not exist and therefore the tax assessment can still be amended. It deals with the allocation of the taxing rights between Luxembourg (employment State) and Germany (residence State) for salaries, wages and similar remuneration (overtime payments, vacation payments, bonuses, etc).
The following table shows how the taxing rights are to be allocated according to the agreement between Luxembourg and Germany.
| Employment State (Luxembourg) | Residence State (Germany) | |
| Principle rule | Working days spent in Luxembourg (‘physical presence’). | Working days spent in Germany or third countries (‘physical presence’). |
| Exception (according to the mutual agreement) | Cross-border workers working less than 20 days abroad and the salaries are taxed in Luxembourg. In that case Germany exempts the salaries from tax. | ’20 days rule’: Cross-border workers working in aggregate 20 days per year in Germany or a third country. In that case a salary split has to be undertaken. Each day spent in Germany or third countries is subject to tax in Germany. |
| Salaries, wages and similar income (sickness benefit, maternity benefit, exempted in Germany). | - | |
| Overtime (spent in the employment state) which will be compensated by free time. | - |
Holidays, legal holidays and those days on which a cross-border worker is not obliged to work should not be taken into account for the break-down of income between state of residence and employment state.
- 4. Implications and recommended actions
In general, German cross-border workers have to record the days spent abroad. As soon as a cross-border worker spends 20 days over the year in Germany or a third country he has to provide the German tax authorities with a break down. As a result a tax return has to be filed in Germany.
It is ATOZ recommendation that German cross-border workers who have worked less than 20 days in Germany and other countries and have already been assessed by the German tax authorities should request an amendment of their tax assessment from the German tax authorities.
For additional information and regarding your individual situation, please contact Peter Kleingarn at Peter.Kleingarn@atoz.lu or Melanie Engel at Melanie.Engel@atoz.lu.
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1Verständigungsvereinbarung zum Abkommen vom 23. August 1958 in der Fassung des Ergänzungsprotokolls vom 15. Juni 1973 zwischen dem Großherzogtum Luxemburg und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung betreffend die steuerliche Behandlung des Arbeitslohns von Grenzpendlern.
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For several years now, trusts have been used in Luxembourg in order to manage assets and preserve wealth. Nevertheless, the concept of trust which is unknown in Luxembourg law gives rise to a number of tax and legal issues. Indeed, when a Luxembourg taxpayer receives income from a Trust, the Luxembourg tax authorities often struggle to identify the appropriate treatment, which, to a large extent, depends upon the role of the different actors within a trust.
In practice, the tax treatment of Trust income is generally determined by comparing the trust to similar structures or vehicles known to Luxembourg law. In particular, the tax authorities generally compare the trust to a fiduciary agreement. In a more limited number of cases, the authorities may compare a trust to an independent estate (Sondervermögen). In all cases, the authorities are trying to identify and tax what they deem to be the economic beneficiary of the income generated by the trust.
Indeed, the most important step in deciding to whom income should be allocated for tax purposes is to determine who controls the assets of a trust. The aim of the presentation dated May 19, 2011 was to suggest some answers to these questions.
Trust structures hail back to Feudal times and were in particular used by crusaders in order to insure their lands were appropriately managed in their absence. The crusaders would give the title to their property to a man of confidence who would manage the estate on behalf of the absent knight under the understanding that the property would be remitted upon the return of the crusader. Sometimes, however, the man of confidence would refuse to remit the property to its original owner or to the heirs. The knights would not be able to sue successfully in common laws courts as they would generally find in favour of the legal owner. The knights thus appealed to the King and by delegation to his Lord Chancellor who would be able to rule according to his conscience. As the chancellor would tend to find the appeal in favour of the returning knight, a relation of confidence enforceable through the equity courts was born. This was the beginning of the trust.
A trust is a relationship between three parties whereby property (real or personal, tangible or intangible) is transferred by one party to be held by another party for the benefit of a third party. A trust is created by a settlor who transfers some or all of his property to a trustee who holds that trust property for the benefit of the beneficiary.
While each trust is somewhat different, three types of trusts are generally distinguished for tax purposes:
- The bare trust is a trust where the beneficiary has an immediate and absolute right to both the capital and income held in the trust.
- The interest in possession trust is a trust where the beneficiary of a trust has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.
- The discretionary trust is a trust where the trustees are responsible for running the trust for the benefit of the beneficiaries. However, the trustees have ’discretion’ about how to use the trust’s income. They may also have discretion about how to distribute the trust’s capital. The trustees may for instance decide to ’accumulate’ income, i.e to add it to the trust’s capital.
A further distinction should be made between revocable trust and irrevocable trusts, the latter is being as a trust that may not be altered or cancelled by the settlor. In the case of a revocable trust, the trust property is generally allocated for tax reasons to the settlor. The tax treatment of an irrevocable trust is more complex.
An irrevocable bare trust would generally be treated as a fiduciary agreement for Luxembourg tax purposes where the beneficiaries of the trust are considered to be the owners of the trust assets as far as income and capital gains are concerned. The same applies by and large to an irrevocable interest in possession trust. However income should only be subject to tax at the level of the beneficiaries of the trust if and when such income is distributed to them.
Finally, the assets of a discretionary trust would be allocated for tax purposes to the trustee. Taxation at the level of the trustee does not necessarily imply that beneficiaries of the trust would escape taxation if and when income out of a discretionary trust is finally distributed to them.
Paul Chambers pointed out that a foreign trust could under certain circumstances become subject to tax in Luxembourg, even if the settlor and the beneficiaries are not resident of Luxembourg. Indeed, in the case of an irrevocable discretionary trust, the trustee is considered to be the economic owner of the trust’s assets.
If the trustee then becomes a Luxembourg resident, so does the trust and it would therefore be subject to corporate income tax at the applicable rate of 22%. The reason for this is that the trust is considered in this case to be an independent estate.
After having ratified “The Hague Convention” of 1985 regarding the recognition of foreign trusts, the Luxembourg government did not introduce a specific income tax regime for trusts. Indeed the law only contains certain clauses pertaining death and/ or inheritance duties. Furthermore, it is still not possible to set up a Luxembourg trust under Luxembourg law. Nevertheless, by recognizing “The Hague Convention”, Luxembourg has taken a significant step forward that facilitates the use of all forms of trusts governed by foreign jurisdictions.
As a conclusion, clear positions should be taken by Luxembourg in order to measure the tax consequences of the asset management through a foreign trust structure. Furthermore, the trust structure is often not foreseen in European legislation, for instance, should the trust be qualified as a paying agent (when paying interest payment) in the sense of the Saving Directive?
For additional information and how you might utilize Trusts as wealth preservation vehicles, please contact Kheira Mebrek at Kheira.Mebrek@atoz.lu
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Luxembourg has concluded a great deal of Double Tax Treaties (“DTTs”) - there are currently 62 in force - and is working towards expanding its DTT network. The most recently concluded treaties include the DTTs with Panama and Barbados. Luxembourg has also renegotiated some of its DTTs (28 DTTs so far) in order to render the exchange of information and transparency provisions in compliance with OECD standards.
Barbados - Luxembourg DTT in brief
Barbados and Luxembourg signed an income and capital tax treaty and an exchange of notes on 1 December 2009. The DTT has now been ratified by Luxembourg.
The new Barbados DTT provides the following maximum rates of withholding tax:
- 0% on dividends to the extent the company receiving the dividend owns directly at least 10% of the capital of the company paying the dividends for an uninterrupted period of at least 12 months prior to the decision to distribute the dividends; 15% in all other cases;
- 0% on interest;
- 0% on royalties.
Capital gains on shares are only taxable in the country of residence of the beneficiary.
As far as Permanent Establishments (“PE”) are concerned, income attributable to a PE is taxable in the PE state.
In order to avoid double taxation, Luxembourg has committed to apply the exemption with progression method, except for dividends and income from artists and sportpersons where the credit method applies. As far as interest and royalties are concerned, since they are exempt from tax in Barbados, they will be fully taxable in Luxembourg.
Barbados generally has opted for the credit method.
The new DTT will apply at the earliest as of 1 January 2012, to the extent that it is ratified by Barbados prior to year-end.
Panama - Luxembourg DTT in brief
Panama and Luxembourg signed an income and capital tax treaty and protocol on 7 October 2010 which has now been ratified by both states.
The new Panama DTT provides the following maximum rates of withholding tax:
- 10% on dividends to the extent the beneficial owner of the dividend is a company which owns directly at least 10% of the capital of the company paying the dividends; 15% in all other cases
- 5% on interest;
- 5% on royalties.
Capital gains on shares are only taxable in the country of residence of the beneficiary. Capital gains on shares in real estate companies are however taxable in the country in which the real estate is situated.
As far as PEs are concerned, the DTT includes a clause, which allows the source state (PE State) to levy an additional 5% branch tax.
In case there is a taxation of the income in both States, Luxembourg generally applies the exemption-with-progression method for the avoidance of double taxation but applies the credit method in respect of dividends, interest, royalties, services and income from artists and sportpersons. Panama applies the exemption-with-progression method.
The new DTT will enter into force 3 months after its ratification and should apply as of 1 January 2012.
Exchange of information in DTTs
Following the announcement made by the Luxembourg Government in 2009 regarding its commitment to comply with OECD standards on international tax cooperation, Luxembourg has been renegotiating many of its DTTs over the past 2 years and has committed in future to only conclude OECD compliant DTTS as regards exchange of information in tax matters.
The most recent DTTs and exchange of information protocols include the ones with Japan, Portugal, Hong-Kong, Sweden, San Marino, Barbados and Panama. The rules regarding exchange of information upon request under these recently concluded DTTs and Protocols are the same as the ones already applicable to former OECD compliant DTTs and Protocols, which are included in the law of 31 March 2010. In this respect, please refer to our March 2010 Newsletter.
As of today, DTTs in line with the OECD version of the exchange of information provisions are as follows: Armenia, Austria, Bahrain, Barbados, Belgium, Denmark, Finland, France, Germany, Hong-Kong, Iceland, India, Japan, Liechtenstein, Mexico, Monaco, Netherlands, Norway, Panama, Portugal, Qatar, San Marino, Spain, Sweden, Switzerland, Turkey, UK and USA.
Implications
These developments can be seen as positive as they demonstrate that Luxembourg is fully complying with the OECD requirements in regards to transparency, which could lead to an expansion of the Luxembourg DTT network and ultimately, the attraction of new foreign investments to Luxembourg. Luxembourg continues to negotiate new DTTs (currently with Sri Lanka and the Seychelles).
For additional information, please contact Samantha Nonnenkamp at Samantha.Nonnenkamp@atoz.lu.
In July of 2009 ATOZ and the Faculty of Law, Economy and Finance of the Luxembourg University signed an agreement creating a Chair in European and International Taxation. It is the first chair of the Faculty benefiting from external financing. The chair, called "ATOZ Chair for International and European Taxation" has been set up to research and develop activities solely focused on International and European Tax law. By designing and funding this important function, ATOZ is aiming to bridge the gap between the academic, regulatory / legislative and practical segments of the International tax community in Luxembourg and demonstrating commitment to developing the tax profession at the highest levels.
The ATOZ Chair for International and European Taxation of the University of Luxembourg has recently issued its first book: “Double Taxation within the European Union”, which deals with current topics of European and International Tax Law. Edited by Alexander Rust, the book includes the extended versions of the oral contributions given at a conference on the subject at the University of Luxembourg back in April 2010.
You will find below extracts of the foreword, which present the objective and a high level overview of the content of the book:
“Despite the conclusion of tax treaties and despite the enactment of several directives double taxation still occurs within the European Union. Double taxation causes severe obstacles for cross-border trade, for the provision of services and capital and for the free movement of persons.
The first two chapters by Rust and Remacle/Nonnenkamp (ATOZ) analyze the reasons for the existence of juridical and economic double taxation. Chapter three by Braum gives an overview over the problematic of double burdens in criminal law and describes the solutions found in this area of law. Kube examines in chapter 4 the constitutional limits for double taxation. Chapter 5 and 6 by Hofmann and Reimer address the consequences resulting from the abolition of Art. 293 EC which obliged the Member States – so far as it was necessary – to conclude tax treaties in order to abolish double taxation. Kofler and Rust ask in chapter 7 and 8 the question whether double taxation can be solved within the European Union by the application of the four freedoms. Their proposals are criticized in chapter 9 and 10 written by Wattel and Thiel. Pistone discusses in chapter 11 whether the conclusion of a multilateral tax treaty or the introduction of the Common Consolidated Corporate Tax Base might constitute a solution for the problem of remaining double taxation. The last chapter 12 by Ismer suggests using the arbitration clauses contained in the tax treaties to solve the remaining double taxation issues.”
For a copy of the book and a calendar of upcoming seminars of the ATOZ Chair for International and European Taxation, please contact your colleagues at ATOZ or Samantha Nonnenkamp at samantha.nonnenkamp@atoz.lu
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ATOZ contributes to the 2011 “Creative Young Entrepreneur Luxembourg” awards event and once again supports the young people of Luxembourg in their efforts to create positive change
As a continuous supporter of the Junior Chamber, ATOZ has once again had the opportunity to actively participate in the CYEL program by lending Keith O’Donnell, Managing Partner of the firm, for the judging process. Keith describes the experience as refreshing and a testament of Luxembourg’s the dedication to innovation and diversity. “Similarly to other programs, the jury was tasked with the review of all applications, the selection of finalists and ultimately, with the identification of a winner. While extremely interesting, the process presented a difficult task in narrowing down the number of entries. As jurors, we had the privilege to examine a high number of fascinating projects with strong environmental and ethical dimensions, and driven by differing understandings of the needs of clients and businesses. It’s also worth noting the diversity of the entrepreneurial group in terms of background and stages of maturity of the businesses, which added another layer of complexity to the selection process. It was truly a rewarding experience and one that I look forward to again next year,” concluded Keith.
As a continuous supporter of the Junior Chamber, ATOZ has once again had the opportunity to actively participate in the CYEL program by lending Keith O’Donnell, Managing Partner of the firm, for the judging process. Keith describes the experience as refreshing and a testament of Luxembourg’s the dedication to innovation and diversity. “Similarly to other programs, the jury was tasked with the review of all applications, the selection of finalists and ultimately, with the identification of a winner. While extremely interesting, the process presented a difficult task in narrowing down the number of entries. As jurors, we had the privilege to examine a high number of fascinating projects with strong environmental and ethical dimensions, and driven by differing understandings of the needs of clients and businesses. It’s also worth noting the diversity of the entrepreneurial group in terms of background and stages of maturity of the businesses, which added another layer of complexity to the selection process. It was truly a rewarding experience and one that I look forward to again next year,” concluded Keith.
For additional information about the 2011 “Creative Young Entrepreneur Luxembourg”, the finalists and winner, please click here.
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The recent transaction between Skype and Microsoft put Luxembourg on the map and demonstrated that the Grand Dutchy offers solid and fertile ground for young and entrepreneurial technology companies. Close to the topic, Norbert Becker, Chairman of ATOZ and a Board Member of Skype, speaks to the press about the deal and the future of Luxembourg in this field. Click here for the article.
For the latest edition of Taxand’s Take, your regular update on the topical tax issues affecting multinationals, please click here.
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