Olivier Sciales Taxation Law Blog on Lawyers.com

The Luxembourg - Hong Kong double tax treaty has entered into force on 20 January 2009 following the exchange of the ratification documents.

I set out hereunder the main features of this treaty. The maximum withholding taxes that will be applicable are as follows:

• 0% on dividends if the beneficial owner is a company that directly holds at least 10% in the capital of the distributing company or the participation has an acquisition cost of at least 1,200,000 Euro;
• 10% on dividends in all other cases;
• 0% on interests; and
• 3% on royalties paid from Hong Kong to Luxembourg. According to Luxembourg internal law, royalties other than royalties for the use of, or the right to use, any copyright of literacy or artistic work are not subject to withholding tax.

Capital gains realised on the sale of assets are taxed in the place where the seller is resident, except if the sold asset qualifies as:

- immovable property situated in the other contracting party;

- movable property allocated to a permanent establishment in the other contracting party;

- shares of a company more than 50% of the value of which is derived directly or indirectly from immovable property situated in the other contracting party;

In other words, a sale of shares held by a Luxembourg parent company in a Hong Kong subsidiary will be only taxable in Luxembourg. In accordance with Luxembourg internal law, such capital gains will be exempted from capital gains tax if the Luxembourg company owns more than 10% of the capital in the Hong Kong subsidiary and the disposal takes place within 6 months of the acquisition of the shareholding.

Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Chinese and Hong Kong investors may be able to use this tax treaty as a platform for their European investments.

Should you have any questions, feel free to contact me at oliviersciales@cs-avocats.lu.