Double Tax Treaty Luxembourg: Key Details and Benefits 2025

Overview of Luxembourg’s double tax treaties

A double taxation treaty (DTT) is a bilateral agreement between two countries designed to prevent the same income from being taxed twice. This can occur when a company earns income in a country other than that of its tax residence. Without such an agreement, the income could be taxed both in the country where it is generated and in the country of residence of the person receiving the profits, resulting in double taxation.

To avoid this situation, Luxembourg has signed double taxation treaties with more than 80 countries around the world. A complete list of double tax treaties in Luxembourg can be found on the website of the Luxembourg Inland Revenue.

Objectives of Luxembourg's double tax treaties

In addition to avoiding double taxation, this type of treaties has many other objectives and benefits, so let's see a list with some of the most important ones, this will allow us to better understand the scope and importance of this type of treaties for Luxembourg as well as for other countries.

Avoidance of double taxation: the main objective of double taxation treaties is to prevent the same income from being taxed in both signatory countries.
Encourage international trade and investment: treaties seek to encourage international trade and investment by providing an attractive and predictable tax environment. This benefits companies and investors who find a more favorable climate for doing international business, which in turn contributes to global economic growth
Ensuring legal certainty and stability for investors: treaties of this type seek to provide clarity and stability in terms of the tax obligations of individuals and companies in both jurisdictions. In this way, investors can better plan their finances and international operations with the assurance that they understand how they will be taxed.
Prevent tax evasion and avoidance: double tax treaties contain information exchange clauses between the tax authorities of both countries, which helps to combat tax evasion and ensure that individuals and companies comply with their tax obligations.
Ensuring an equitable distribution of tax duties: one of the most important objectives is to ensure that tax revenues are distributed fairly among the signatory countries, based on the principle that profits should be taxed where they are generated.
Improving administrative cooperation between the signatory countries: another important objective is to facilitate the exchange of information between the tax authorities of the signatory countries. This makes it easier to combat tax fraud and to ensure that individuals and companies comply with their tax obligations.
Ensuring fair taxation for cross-border workers: double taxation treaties also aim to protect people working in a country other than their own by preventing them from being taxed disproportionately. This scenario is extremely common in Luxembourg as in 2023, the country had 227,955 frontier workers, which was 47% of the country's employment force.
Introduce dispute resolution mechanisms: treaties generally include dispute resolution mechanisms to which individuals or companies facing double taxation problems can have recourse.
Align with OECD recommendations and the BEPS plan: finally, another major objective of double tax treaties is to comply with the international recommendations established by the OECD and the Base Erosion and Profit Shifting Action Plan (BEPS). In many cases, existing treaties are updated and adjusted to incorporate these recommendations with measures that prevent tax erosion and ensure that multinational companies pay taxes where they generate value.

Mechanisms of double tax treaties

Double tax treaties primarily use two methods to avoid double taxation on income or profits that an individual or entity generates in one country while residing in another: the exemption method and the tax credit method. In some cases, however, both methods are used in combination. Let's take a closer look at these mechanisms.

Exemptions

With this approach the country of residence exempts from taxation income that has already been taxed in the country where it was generated. This method has two variants:

Complete exemption: Income earned abroad is completely exempt from taxation in the country of residence.
Partial exemption: Exempt foreign income is not subject to tax in the country of residence but is considered when calculating the tax rate to be applied to other taxable income of the taxpayer. Thus exempt income may affect the tax rate applied to the remaining income but is not taxed directly.

Tax credits

The tax credit method implies that the country of residence does not exempt income earned abroad but allows the person or company in question to deduct through tax credits the taxes already paid abroad from the total amount of taxes due in their country of residence.

Combined methods

Double tax treaties may sometimes use a combination of both methods depending on the type of income. For example some income, such as income from salaried work, may be subject to the exemption method while other income, such as interest or dividends, may be subject to the tax credit method. This approach provides flexibility to adapt to the particularities of the income and tax policies of both countries.

Taxes covered by the treaties

Luxembourg's double tax treaties, like most double tax treaties of other nations, generally cover a wide variety of taxes that could be classified into two broad groups: income taxes and wealth taxes.

Income taxes

This group covers taxes on income earned by both individuals and corporations and includes a wide variety of income:

Wages and salaries: treaties specify how income derived from work such as wages salaries and remunerations are taxed. Generally, this income is taxed in the country where the work is carried out although there are exceptions to avoid double taxation when workers move temporarily between the signatory countries.
Dividends: treaties regulate how dividends paid between countries are taxed by reducing withholding rates or providing exemptions to avoid double taxation.
Interest: although interest is a type of income covered by income taxes treaties often include specific provisions for these payments due to their importance in international financial transactions. Reduced withholding rates or exemptions are usually established to facilitate the flow of capital between countries.
Royalties: Treaties also regulate payments for the use of intellectual property such as patents and copyrights.
Capital gains: capital gains provisions determine how and where gains from the sale or transfer of assets such as real estate or shares are to be taxed.

Wealth taxes.

Some treaties also cover wealth taxes, establishing rules to prevent a person or entity from being taxed on its total wealth in more than one country.

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Overview of some double tax treaties in Luxembourg

To conclude our tour on double taxation treaties, we will take a look at some of the main treaties signed by Luxembourg.

DTT between Luxembourg and France

The double taxation treaty between France and Luxembourg has existed for many years, however, it has received numerous modifications over time, the version in force was signed on March 20, 2018. It is important, however, to mention that on October 10, 2019, both countries signed an amendment to the convention but the application of this agreement has been suspended for 2020, 2021, 2022 and 2023 and it is expected that by 2024 (which is declarable in 2025) this this this convention will already be applied.

This new double taxation treaty presents, according to the opinion of many, some notable disadvantages for French frontier workers. This is the reason why its application has been delayed. With this new treaty, France will no longer take into account the taxes paid in Luxembourg for the calculation of the tax rate and this will cause the tax rate to rise considerably thanks to a non-received income. This affects those who in addition to the Luxembourg salary have income from French sources or those who have a partner in France and make a joint taxation.

DTT between Luxembourg and the United Kingdom

Since 1967 there has been a double taxation treaty between the United Kingdom and Luxembourg, however in June 2022 a new treaty was signed which came into force on November 22, 2023. This new treaty introduces significant changes to better address modern tax complexities. One of the main updates is the new clause on property-rich companies, which allows taxation of profits from the sale of shares of these companies in the country where the property is located. In addition, the withholding tax on royalties is eliminated (reduction to 0%), harmonizing with Luxembourg law. The withholding tax on dividends is also reduced, remaining at 0% for the majority except for certain specific cases such as dividends from REITs.

The treaty also redefines the way to resolve cases of dual residence of companies, moving from the “effective management” criterion to a mutual agreement, and updates the definition of permanent establishment, increasing the minimum time for construction projects from 6 to 12 months. It also includes much simpler rules aligned with OECD transfer pricing principles for business profits and formalizes the Principal Purpose Test (PPT) to avoid tax abuses. Finally, new arbitration rules and mechanisms for cross-border collaboration in tax collection are introduced.

DTT between Luxembourg and Germany

It was first signed on August 23, 1958, and was replaced by a more recent version on April 23, 2012. The treaty covers various areas of taxation, such as withholding taxes, dividends, interest, royalties, real estate income, employment income, business profits and income from independent personal services among others.

One of the most important particularities of this new treaty is that it adheres to the internationally recognized OECD model. Some key points of this treaty are the inclusion of changes in withholding tax rates for dividends and royalties and the introduction of a clause for real estate-rich companies that taxes capital gains on shares derived from real estate located in a contracting state.

In addition, the new treaty provides for a mutual agreement process and an arbitration procedure to avoid double taxation and double non-taxation. Luxembourg companies engaged in “active” activities within the meaning of German CFC rules are exempt from German tax on dividends and in all other cases. In addition, under this new treaty, withholding tax rates on dividends are reduced to 5% for holdings of 10% or more, while withholding tax rates on interest and royalties remain unchanged.

DTT between Luxembourg and Belgium

The double tax treaty between Luxembourg and Belgium was initially signed in 1970 however this has undergone several modifications since then, the most recent version of the agreement was signed on September 17, 2014 and entered into force on January 1, 2015. This updated agreement incorporates modern provisions to avoid double taxation and prevent tax evasion, aligning with OECD recommendations and BEPS Plan measures.

DTT between Luxembourg and the United States

The agreement to avoid double taxation between Luxembourg and the United States was signed on April 3, 1996, and entered into force on January 1, 2021. This agreement aims to eliminate double taxation on income and prevent tax evasion between the two countries.

The last significant modification of this agreement was made through a protocol signed on May 20, 2009. The main modifications introduced are aimed at implementing the provisions of the OECD model convention on international tax cooperation.

One of the main features of this protocol is that it provides for the exchange of information upon request in individual cases between the tax administrations of both countries for the tax years 2009 and subsequent years. However, the agreement does not provide for an automatic exchange of banking information and does not authorize general requests (“fishing expeditions”).

FAQ

How do double tax treaties prevent double taxation?

Double tax treaties prevent double taxation by specifying how income, such as salaries, dividends, interest, and royalties, should be taxed between the two countries. They allocate taxing rights, often giving the primary right to tax to the country where the income is generated, while the other country either exempts the income or provides a tax credit for the tax paid abroad. These mechanisms ensure that income is not taxed twice, promoting fairness and cross-border economic activity.

Are there any anti-abuse provisions in double tax treaties?

Anti-abuse provisions are common in Luxembourg's double tax treaties to prevent tax evasion and treaty shopping. These include the Principal Purpose Test (PPT), which denies treaty benefits if obtaining a tax advantage is the primary purpose of a transaction. Other provisions, like the Limitation on Benefits (LOB) clause, restrict benefits to entities with genuine economic activity.

How does Luxembourg handle disputes or disagreements related to double-tax treaties?

Luxembourg handles disputes related to double tax treaties through Mutual Agreement Procedures (MAP). Under MAP, the tax authorities of both countries involved work together to resolve issues such as double taxation or differing treaty interpretations. This cooperative approach ensures disputes are settled amicably, providing taxpayers with a mechanism to address unfair tax outcomes.

Luxembourg’s double tax treaties