Recent Tax Circulars Concerning Treaty Protection of Luxembourg Investment Funds

On 12 February 2015, the Luxembourg tax administration issued tax circular L.G. – A. 61 concerning the procedure and conditions for Luxembourg collective investment schemes to obtain a Luxembourg tax resident certificate (the “Circular”). The Circular applies to Luxembourg Sociétés d'investissement à capital variable ("SICAVs")(1) and Fonds Communs de Placement (“FCPs”) governed by the Laws of 13 February 2007 on specialised investment funds (“SIFs”) and of 17 December 2010 on undertakings for collective investment. It sets out general principles for both SICAVs and FCPs but also deals with certain special situations, mainly applying to FCPs.

A few rare tax treaties apply to Luxembourg collective investment schemes without distinction; thus to both SICAVs and to FCPs (e.g., tax treaties with Saudi Arabia and Tajikistan).

1. SICAVs :

As regards SICAVs, in the Circular the Luxembourg tax authorities express the view that, in line with the modern approach of the “tax residency” concept under the OECD Model Tax Convention, a SICAV is a tax-resident entity in the sense of Luxembourg domestic tax laws and this despite the fact that it benefits from a subjective tax exemption as an entity as a whole (and not for certain items of income only). The Circular expressly specifies that the same reasoning applies to SICAVs set up as SIFs, despite their more “closed-end” character.

A list of the tax treaties that apply to SICAVs, is available on page 5 of the Circular.

The developments on domestic law-based protection for SICAVs are perhaps the most surprising statements of the Circular. As we have seen above, SICAVs are considered by the Luxembourg tax authorities as tax resident entities in the sense of Luxembourg domestic tax laws and regulations. In the Circular, the Luxembourg tax authorities express the view that a tax resident certificate, based on Luxembourg domestic tax law (as opposed to a request for application under a given tax treaty concluded by Luxembourg) can be obtained by a SICAV whose statutory seat or central administration is based in Luxembourg, in the following three situations: first, a tax treaty exists under which the Other Contracting State grants treaty benefits to the SICAV; second, a tax treaty exists but the Other Contracting State denies treaty benefits to the SICAV; and third, no tax treaty exists between Luxembourg and the source State.

It would seem to us that the second scenario is breaking ground in that traditionally the Luxembourg tax authorities refused to grant a domestic law-based tax-resident certificate for a SICAV, in case the other Contracting State denied application of the respective bilateral tax treaty to SICAVs. This may open interesting perspectives.

2. FCPs :

Even though under Luxembourg domestic law, FCPs are not treated as fully tax transparent at least where the taxation of Luxembourg resident individual investors is concerned, the Circular clarifies that, due to their tax transparency, FCPs do not, from a Luxembourg tax perspective, benefit from treaty protection in their own right, with one historical exception being the tax treaty with Ireland.

More interestingly, the Circular sets out a certain number of special situations, mainly concerning FCPs, which are the following.

Certain tax treaties concluded by Luxembourg consider that an investment fund established in a Contracting State that is not a body corporate for domestic tax purposes is considered for the application of this tax treaty as a treaty-protected individual (and beneficial owner of the income concerned). Thus, an FCP benefits in the same way as a Luxembourg-resident individual from the provisions of the respective tax treaty (e.g., tax treaties with Guernsey, Isle of Man, Jersey, Seychelles). This means that the Luxembourg tax authorities will establish a tax-resident certificate for the Luxembourg investment fund concerned. This is in principle especially important with respect to capital gains taxation as it means that in principle taxation for non-substantial shareholdings and other financial assets should in these cases be allocated to Luxembourg, thus benefiting from an exemption, and no longer to the source State. Such a constructive approach which somehow puts traditional principles and concepts of international taxation at odds, and which should be considered as a compromise solution, is based on the updated Commentaries to Article 1 of the OECD Model Tax Convention, pursuant to the report “The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles” from the Committee on Fiscal Affairs of 23 April 2010.

Another specific situation influenced by the above OECD report has been commented on in more detail by Tax Circular L.G. Conv. D.I. 58 of 9 February 2015 which concerns the eligibility of Luxembourg FCPs for the application of reduced withholding tax rates for German source dividend and/or interest for the proportion of such income attributable to Luxembourg tax resident investors in the fund. Under the specific procedure provided for in the protocol to the new tax treaty with Germany, the FCP acts as a collecting agent collectively for the Luxembourg tax resident investors in the fund who conversely lose their entitlement to claim treaty for the same income. In this context it is unambiguously specified that the FCP is not entitled to treaty protection in its own right. Oddly, however, the Circular contains a statement to the contrary by confirming that under the treaty with Germany an FCP is to be considered as a resident and is to be granted a tax resident certificate. Last but not least one may question whether the fact that the collecting procedure under the protocol is limited only to investors who are tax resident in the same jurisdiction as the fund is not to be considered in violation of the findings of the ECJ in the Open Skies cases (2) and should normally be extended to any EU/EEA investors in the fund.

The procedural aspects of both tax-resident certificate applications are described on pages 6 and 9 of the Circular.

(1) The developments made hereafter for SICAVs apply mutatis mutandis to SICAFs.

(2) C-466/98, C-467/98, C-468/98, C-469/98, C-471/98, C-472/98, C-475/98 and C-476/98 all of 5 November 2002.