Updates to UK-Luxembourg Tax Convention: Implications for Investors

The United Kingdom and Luxembourg inked a revised double tax convention and protocol (DTT) in July 2022, which took effect on November 22, 2023. The DTT will impact UK income and capital gains tax starting from April 2024, and from January 1, 2024, for income withheld at the source. A notable amendment in the DTT is the inclusion of a “land-rich company” provision, where capital gains from shares or similar interests primarily linked to real estate will be taxed in the country where the real estate is situated. This aligns the UK-Luxembourg DTT with the OECD model tax convention and most of the UK’s other double tax treaties. Additionally, the new treaty eliminates withholding tax on dividends for residents of the other contracting state, except for property income distributions (PIDs) from real estate investment trusts (REITs), where a capped withholding tax of 15% applies. Furthermore, interest withholding tax remains at 0%, and royalties withholding tax has been reduced to nil, provided the amounts are at arm’s length. The benefits of the new treaty extend to certain collective investment vehicles (CIVs), particularly Luxembourg CIVs treated as corporate bodies for tax purposes. These entities will benefit from the new DTT if held by equivalent beneficiaries, with conditions related to residency and information exchange agreements. It is crucial for those dealing with UK property-rich entities to consider these treaty changes, as they will affect tax implications from April 2024 onwards.

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