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US Income Tax Agreement With Luxembourg Now In Effect

Ulrika Lomas, Tax-news.com, Brussels

05 January 2001

The US Treasury Department has announced the ratification of a new US Income Tax Treaty with Luxembourg.

The Treasury Department said that instruments of ratification were exchanged in Washington on December 20, 2000 with respect to a new income tax treaty with Luxembourg. The new treaty, to which the Senate gave advice and consent to ratification on October 31, 1997, replaces an existing income tax treaty between the United States and Luxembourg that entered into force in 1963.

In general, the new treaty will have effect, with respect to taxes withheld at source, for amounts paid or credited on or after January 1, 2001 and, for other taxes, with respect to taxable years beginning on or after January 1, 2001.

There has been considerable administrative delay in bringing the new treaty into force. In late 1998, the United States Senate approved the Mutual Legal Assistance Treaty ("MLAT") between the United States and Luxembourg, which was supposed to have cleared the way for the exchange of instruments and entry into force of the new (1996) United States-Luxembourg Tax Treaty. The new Luxembourg Tax Treaty was expected to enter into force on 1 January 1999, so it is two years late.

The implementation of the treaty is a very important development for European Union companies that want to hold US operations through an intermediate holding company eligible for tax-favoured treatment. In the past, The Netherlands has been the typical focus for such intermediary companies. However, the recent (1992) US-Netherlands Tax Treaty made it necessary to get a ruling from the US tax authorities for the intermediate Netherlands company to qualify for tax treaty benefits. This awkward, time-consuming, and expensive process has made The Netherlands less attractive.

Under the new Luxembourg Tax Treaty there is no such requirement, as long as the intermediate Luxembourg holding company is owned by a resident of an EU country with a tax treaty with the United States, and certain other standards are satisfied.

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