Text - Treaty Document: Senate Consideration of Treaty Document 104-33All Information (Except Treaty Text)

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[Senate Treaty Document 104-33]
[From the U.S. Government Publishing Office]



104th Congress                                              Treaty Doc.
                                 SENATE     

 2d Session                                                      104-33
_______________________________________________________________________



 
                  TAXATION CONVENTION WITH LUXEMBOURG

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

 CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND 
 THE GOVERNMENT OF THE GRAND DUCHY OF LUXEMBOURG FOR THE AVOIDANCE OF 
 DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO 
   TAXES ON INCOME AND CAPITAL, SIGNED AT LUXEMBOURG ON APRIL 3, 1996




 September 4, 1996.--Convention was read the first time and, together 
  with the accompanying papers, referred to the Committee on Foreign 
     Relations and ordered to be printed for the use of the Senate.



                         LETTER OF TRANSMITTAL

                              ----------                              

                                The White House, September 4, 1996.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification the Convention Between the Government of the 
United States of America and the Government of the Grand Duchy 
of Luxembourg for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income 
and Capital, signed at Luxembourg April 3, 1996. Accompanying 
the Convention is a related exchange of notes providing 
clarification with respect to the application of the Convention 
in specified cases. Also transmitted for the information of the 
Senate is the report of the Department of State with respect to 
the Convention.
    This Convention, which is similar to tax treaties between 
the United States and other OECD nations, provides maximum 
rates of tax to be applied to various types of income and 
protection from double taxation of income. The Convention also 
provides for exchange of information to prevent fiscal evasion 
and sets forth standard rules to limit the benefits of the 
Convention to persons that are not engaged in treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to this Convention and give its advice and 
consent to ratification.


                                                William J. Clinton.



                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                       Washington, August 30, 1996.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, the Convention Between the Government of the 
United States of America and the Government of the Grand Duchy 
of Luxembourg for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income 
and Capital, signed at Luxembourg April 3, 1996 (``the 
Convention''). Also enclosed for the information of the Senate 
is an exchange of notes which provides clarification with 
respect to the application of the Convention in specified 
cases.
    This Convention will replace the existing Convention 
between the United States of America and the Grand Duchy of 
Luxembourg with Respect to Taxes on Income and Property signed 
December 18, 1962. The new Convention maintains many provisions 
of the existing convention, but it also provides certain 
additional benefits and updates the text to reflect current tax 
treaty policies.
    This Convention is similar to the tax treaties between the 
United States and other OECD nations. It provides maximum rates 
of tax to be applied to various types of income, protection 
from double taxation of income, exchange of information to 
prevent fiscal evasion, and standard rules to limit the 
benefits of the Convention to persons that are not engaged in 
treaty-shopping. Like other U.S. tax conventions, this 
Convention provides rules specifying when income that arises in 
one of the countries and is derived by residents of the other 
country may be taxed by the country in which the income arises 
(the ``source'' country).
    With respect to U.S. taxes, this Convention applies to 
federal income taxes (excluding social security taxes), and 
federal excise taxes imposed on premiums paid to foreign 
insurers other than premiums for reinsurance. For Luxembourg 
taxes, the Convention applies to the income tax on individuals, 
communal trade tax, corporation tax, capital tax, and tax on 
the fees of directors of companies; it also applies to 
Luxembourg's surcharges for its employment fund on individual 
income and corporate taxes. Like the 1962 convention, however, 
this convention does not apply to Luxembourg corporations that 
are now entitled, or subsequently become entitled, to special 
tax benefits available to companies that do not engage in an 
active trade or business, so-called 1929 holding companies. 
These companies are exempt from Luxembourg income tax on the 
receipt of income, and their shareholders are exempt from 
Luxembourg tax on the receipt of dividends from these 
companies.
    The Convention establishes maximum rate of tax that may be 
imposed by the source country on specified categories of 
income, including dividends, interest, and royalties. In most 
respects, these rates are the same as in many recent U.S. 
treaties with OECD countries. With one exception, the 
withholding rates on investment income are generally the same 
as in the present U.S.-Luxembourg treaty. Dividends on direct 
investments are generally subject to tax by the source country 
at a rate of five percent. However, dividends paid by companies 
that are residents of Luxembourg will be exempt from taxation 
by the source country if derived by a 25-percent shareholder 
from a company engaged in the active conduct of a trade or 
business in Luxembourg. Portfolio dividends remain taxable at 
15 percent. In contrast, the current convention ties the tax 
rate on portfolio dividends to Luxembourg's statutory rate of 
tax.
    Interest and royalties are generally exempt under the 
Convention from tax by the source country as under the present 
treaty. In general, interest and royalties derived and 
beneficially owned by a resident of a Contracting State are 
taxable only in that State. This is not true, however, if the 
beneficial owner of the interest is a resident of one 
Contracting State and the interest arises in the other 
Contracting State from a permanent establishment through which 
the interest owner carries on business or from a fixed base 
from which the owner carries on personal services. In that 
situation, the income is to be considered either business 
profits or independent personal services income.
    Like other U.S. tax treaties, this Convention provides the 
standard anti-abuse rules for certain classes of investment 
income. In addition, the proposed Convention provides for the 
elimination of another potential abuse relating to the granting 
of U.S. treaty benefits in the so-called ``triangular cases,'' 
to third-country permanent establishments of Luxembourg 
corporations that are exempt from tax in Luxembourg by 
operation of Luxembourg law. Under the proposed rule, full U.S. 
treaty benefits will be granted in these ``triangular cases'' 
only when the U.S.-source income is subject to a significant 
level of tax in Luxembourg and in the country in which the 
permanent establishment is located.
    The taxation of capital gains under the Convention is 
similar to the rule in the present treaty and recent U.S. tax 
treaties. Gains from the sale of personal property are taxed 
only in the seller's State or residence unless they are 
attributable to a permanent establishment or fixed base in the 
other State.
    The proposed Convention generally follows the standard 
rules for taxation by one country of the business profits of a 
resident of the other. Each Contracting State may tax business 
profits of an enterprise of the other State only when the 
profits are attributable to a permanent establishment located 
in the first state.
    As with all recent U.S. treaties, this Convention permits 
the United States to tax branch operations. This is not 
permitted under the present treaty. The proposed Convention 
also accommodates a provision of the 1986 Tax Reform Act that 
attributes to a permanent-establishment income that is earned 
during the life of the permanent establishment but is deferred 
and not received until after the permanent establishment no 
longer exists.
    Consistent with U.S. treaty policy, the proposed Convention 
permits only the country of residence to tax profits from 
international carriage by ships or airplanes and income from 
the use or rental of ships, aircraft, or containers. Under the 
present treaty, only the State where the ship or aircraft is 
registered may tax the income derived from the operation of the 
ships or aircraft.
    The taxation of income from the performance of personal 
services under the proposed Convention is essentially the same 
as that under other recent U.S. treaties with OECD countries. 
Such income is taxable only the State of the person's residence 
unless the person has a fixed base regularly available in the 
other Contracting State. Unlike many U.S. treaties, however, 
the proposed Convention allows the resident state to tax the 
income derived from employment abroad a ship or aircraft 
operated in international traffic if the enterprise's 
Contracting State fails to tax the income.
    The proposed Convention contains standard rules making its 
benefits unavailable to persons engaged in treaty-shopping. The 
current treaty contains no such anti-treaty-shopping rules. 
Under the proposed Convention, a company will be entitled to 
benefits if it is a ``qualified resident'' of a Contracting 
State as defined in the Convention.
    The proposed Convention contains a variation on certain 
derivative benefits provisions contained in recent treaties 
between the United States and the member states of the European 
Union. The proposed Convention allows subsidiaries of publicly-
traded companies to obtain benefits if seven or fewer residents 
of a state that is a member of the European Union or a party to 
the North American Free Trade Agreement own at least 95 percent 
of the company and the other state has a comprehensive income 
tax convention with the Contracting State. The treaty does not 
establish a minimum threshold for Luxembourg ownership.
    The proposed Convention also contains the standard rules 
necessary for administering the Convention, including rules for 
the resolution of disputes under the Convention and for 
exchange of information. Unlike the current convention, the 
proposed Convention contains a provision dealing with items of 
income that are not dealt with specifically in other articles. 
Such a provision is standard in our modern treaties.
    The Convention authorizes the General Accounting Office and 
the Tax-Writing Committees of Congress to obtain access to 
certain tax information exchanged under the Convention for use 
in their oversight of the administration of U.S. tax laws and 
treaties.
    This Convention is subject to ratification. It will enter 
into force on the day that the instruments of ratification are 
exchanged. It will have effect with respect to taxes withheld 
by the source country for payments made or credited on or after 
the first day of January following entry into force and in 
other cases for taxable years beginning on or after the first 
day of January following the date on which the Convention 
enters into force. When the present convention affords a more 
favorable result for a taxpayer than the proposed Convention, 
the taxpayer may elect to continue to apply the provisions of 
the present convention, in its entirety, for one additional 
year.
    This Convention will remain in force indefinitely unless 
terminated by one of the Contracting States. Either State may 
terminate the Convention by giving at least six months of prior 
notice through diplomatic channels.
    An exchange of notes accompanies the Convention and is 
provided for the information of the Senate. This exchange of 
notes clarifies the application of the Convention in specified 
cases. For example, the notes specify that certain information 
pertaining to financial institutions may be obtained and 
provided to certain U.S. authorities only in accordance with 
the terms of the Treaty Between the United States and 
Luxembourg on Mutual Legal Assistance in Criminal Matters. That 
treaty, which sets forth the scope of that obligation, is 
expected to be signed shortly and submitted to the Senate for 
its advice and consent to ratification.
    A technical memorandum explaining in detail the provisions 
of the Convention will be prepared by the Department of the 
Treasury and will be submitted separately to the Senate 
Committee on Foreign Relations.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the Convention. It has the 
full approval of both Departments.
    Respectfully submitted,
                                                     Lynn E. Davis.