Luxembourg: Luxembourg’s Direct Tax Administration Publishes Circular On Residency Certificates For Funds

Luxembourg’s Direct Tax Administration has published a circular on February 12 clarifying issues relating to residency certificates for Luxembourg funds. These are applicable to both UCITS and non-UCITS funds regulated by Luxembourg’s investment fund legislation of December 17, 2010, which transposed the UCITS IV Directive, as well as Specialised Investment Funds set up under the law of February 13, 2007.

The circular notes that Article 1 of the OECD model double taxation treaty restricts the benefits of such agreements to ‘persons’ that are ‘residents’ of one or the other contracting state. Funds set up as fonds commun de placement cannot benefit from the treaty provisions in their own right since, being fiscally transparent, they are not treated as taxable entities. As a rule an FCP is not considered a resident of the state where it is established – although investors in FCPs can enjoy the tax treaty benefits if they are themselves Luxembourg residents.

Under these circumstances the Direct Tax Administration cannot issue residency certificates for FCPs, although the Ireland-Luxembourg tax treaty allows FCPs to enjoy treaty benefits even without a certificate.

Open-ended or closed-ended investment companies – SICAVs and SICAFs – are considered Luxembourg-resident, according to Article 159 of the Income Tax Law, if they have either their head office or their central administration in the grand duchy. However, collective vehicles are exempt from income and other corporate taxes, apart from the subscription tax, under Article 161 if so designated by a ‘special’ law, namely those of 2010 and 2007.

Luxembourg’s position is that corporate investment vehicles are subject to tax in the grand duchy even if the state does not exercise the right to tax them, in the same way as with pension funds or charitable institutions, and most states treat such entities as resident for tax treaty purposes. But the administration acknowledges that not all of Luxembourg’s treaty partners share that view and that SICAVs and SICAFs are not always able to enjoy treaty benefits.

In the case of tax treaties that apply to collective investment vehicles, either through a specific provision between regulatory authorities (Denmark, Indonesia, Ireland, Morocco and Spain), a clear indication in the treaty, either an explicit inclusion clause or the absence of any exclusion clause (40 countries and territories including Austria, the Channel Islands, China, Germany, Malta, Monaco, Portugal, Qatar and Turkey), or the view of the Luxembourg tax authorities (Finland, Kazakhstan, Singapore, Slovakia and Thailand), funds must obtain a residence certificate in order to benefit from treaty provisions.

Requests must be submitted to the Direct Tax Administration, accompanied by an attestation from the CSSF certifying that the applicant is established in the form of a SICAV or SICAF and is subject to its regulatory supervision.

Some of Luxembourg’s more recent tax treaties contain a provision stating that a collective investment vehicle established in a contracting state but that is not considered a legal entity for taxation purposes in that state is nevertheless to be treated in the same way as a resident individual and as the effective beneficiary of the revenues it receives. Such a clause allows FCPs access to treaty benefits and to benefit from withholding rates applicable to resident individuals, for which it must obtain a residence certificate.

Other treaties (Seychelles, Tajikistan, the UK Crown Dependencies and Saudi Arabia) include a general provision deeming investment vehicles to be residents of the jurisdiction in which they are established and giving them access to treaty benefits whether or not they are tax-transparent. The treaty with Germany expressly considers FCPs to be resident, subject to production of a certificate, although it also restricts the application of the provisions regarding dividend of interest income to the proportion of the fund held by domestic investors.

Other tax treaties do not apply to collective investment vehicles, either though a formal agreement (Belgium, Brazil, Japan, Netherlands, Norway, South Africa and the UK), a clear indication in the text (Canada, Estonia, Hungary, India, Iceland, Latvia, Lithuania and Switzerland), an explicit treaty provision or protocol (France, Mauritius, Mexico, Sweden and the US), or the interpretation of the tax authorities (Russia).

Any SICAV or SICAF can obtain a residency certificate drawn up on the basis of Luxembourg’s internal law if they have their head office or central administration in the grand duchy. In addition to CSSF certification, they must submit the reason for their request, referring explicitly to any stipulation in foreign legislation or a tax treaty that requires it.

They must also provide the tax authority with details of the revenue to which the request relates, or if it has not yet been received, information about the fund’s investment policy, with the promise of providing full details at the latest by June 30 of the year following the financial year in which the revenues are booked.