Alternative Market Briefing

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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