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Law firm Dechert warns that the new German/Luxembourg tax treaty may impact on investors

Wednesday, May 09, 2012

Beverly Chandler, Opalesque London: Dechert reports that on the 23rd April 2012, Germany and Luxembourg signed a new Double Tax Treaty designed to replace the previous treaty dating back to 1958. The firm warns that the new Treaty may impact on many US, UK and other non-German investors as Luxembourg isoften used as a tax efficient jurisdiction for German inbound investments (particularly used by funds, private equity and real estate investors).

At a high level, Dechert lists the main changes as:

  • Explicit Treaty access for funds Luxembourg investment funds in the legal form of a SICAV, SIVAF or SICAR are to be able to claim Treaty benefits in their own name (leading to a reduction of German withholding tax from 26.375% to 15 % on (portfolio) dividends and to 0 % for interest payments). Investment funds of a contractual type (i.e. FCP) qualify for a limited Treaty benefit, i.e. subject to the (German) tax residency of its investor base.
  • Investment into real estate companies The Treaty provides for a new provision which covers capital gains from shares in companies which derive more than 50 % of their value directly or indirectly from real estate assets. Hence, investments in German real estate holding companies, held through a Luxembourg holding company, may be subject to German tax under the new Treaty.
  • Hybrid debt instruments (often used by private equity and real estate funds) Investments in German target companies (e.g. by private equity and real es......................

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