Under Luxembourg domestic law, no WHT is levied on dividends paid by a Luxembourg qualifying subsidiary to an entity that is:
- a collective entity falling within the scope of the Parent Subsidiary Directive
- a Luxembourg resident joint-stock company, which is fully taxable and does not take one of the forms listed in the LITL
- a PE of a collective entity falling under the previous categories
- a collective entity that is resident in a country with which Luxembourg has concluded a DTT and is fully liable to a tax corresponding to the Luxembourg CIT, or a domestic PE of such an entity
- a Swiss resident joint-stock company that is subject to Swiss CIT without benefiting from any exemption
- a joint-stock company or a cooperative company that is resident in an EEA member state (other than an EU member state) and is fully liable to a tax corresponding to the Luxembourg CIT, or
- a PE of a joint-stock company or of a cooperative company that is resident in an EEA member state (other than an EU member state), and
- at the date on which the income is made available, the beneficiary has been holding or undertakes to hold, directly, for an uninterrupted period of at least 12 months, a participation of at least 10%, or with an acquisition price of at least EUR 1.2 million in the share capital of the income debtor.
Qualifying shareholders under (b) to (g) above need to be fully taxable collective entities subject in their country of residence to a tax similar to that imposed by Luxembourg. As a general rule, this requirement is met if the foreign tax is compulsorily levied at an effective rate of at least 8.5%, on a basis similar to the Luxembourg one.
Provisions effective from 1 January 2016, amending the participation exemption regime, transpose effectively verbatim) into Luxembourg law the “anti-hybrid instrument” and “common minimum anti-avoidance rule” (EU PSD GAAR) measures amending the EU Parent-Subsidiary Directive (PSD), adopted in July 2014 and January 2015 respectively.
The dividend exemption does not apply to dividends or profit distribution income that are tax deductible in the hands of the distributing entity.
EU PSD GAAR:
The participation exemption no longer applies to dividends distributed by a subsidiary resident in another Member State (which would otherwise qualify for the participation exemption) if the income is received as part of an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the PSD, are not genuine having regard to all relevant facts and circumstances.
An arrangement may comprise more than one step or part. For the purposes of the GAAR, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. It is therefore increasingly important to continually monitor the substance and activities of entities in a structure.