The US Treasury Department today announced that the US and Luxembourg, during negotiations for new protocol to their 2000 tax treaty, have agreed to provisions to address tax avoidance through triangular and exempt permanent establishments consistent with the US model tax treaty.
The Luxembourg government today also introduced Bill Number 7006 into Parliament to implement the change in Luxembourg.
Assuming the law is passed and the protocol enters into force, the changes will take effect for amounts paid or credited three days after publication of the law in the Official Gazette of Luxembourg.
Of concern are instances where US source income is paid to Luxembourg residents that, for purposes of Luxembourg tax law, treat the income as attributable to a permanent establishment in the United States, and therefore as exempt from tax in Luxembourg, while at the same time, treat the income as exempt from tax in the United States, Treasury said.
Following new Article 1, Paragraph 8, of the 2016 US Model Tax Convention, the protocol would remove benefits that would otherwise apply under the US/Luxembourg tax treaty, including reduced withholding tax rates, in cases where a structure involves an exempt PE, namely, where the residence state earns income from the other state but treats the income as attributable to a PE situated outside the state and the income is taxed below a combined aggregate effective rate of 15 percent or 60 percent of the general statutory rate of the residence state.
Treaty benefits are also removed where the residence state treats the income as attributable to a PE situated outside the state and the permanent establishment is located in a third country that lacks a comprehensive double tax treaty with the contracting state where the benefits are being claimed, unless the residence state taxes the income.
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