Revised UK-Luxembourg Double Tax Treaty May Have Impact on Structures for Investing in UK Real Estate
A new version of the UK-Luxembourg double tax treaty has been published in which significant changes have been made to the capital gains tax article, amongst other provisions. The revised capital gains article, unlike the previous version, contains a “land-rich company” clause under which capital gains on sale of shares or comparable interests deriving more than 50% of their value directly or indirectly from real estate may be taxed in the country where the real estate is located. This brings the UK-Luxembourg double tax treaty into line with most of the UK’s other double tax treaties, and removes a potential advantage of investing in UK real estate via a Luxembourg platform.
Since April 2019, the UK has imposed a tax charge on capital gains arising on the sale of UK land-rich vehicles where (broadly speaking) the vehicle derives, directly or indirectly, at least 75% of its gross value from UK land. The current UK-Luxembourg double tax treaty, unlike most of the UK’s double tax treaties, allows Luxembourg residents (such as Luxembourg resident holding companies) to avoid paying UK tax on a capital gain realised on a disposal of an interest in a vehicle holding UK land. This benefit has been removed from the new treaty where a Luxembourg shareholder sells shares, or comparable interests such as interests in a partnership or trust, which derive more than 50% of their value directly or indirectly from UK land. Even though the tax treaty benefit has been removed in respect of disposal of entities deriving at least 50% of their value from UK land, since the UK tax charge arises only when the vehicle derives, directly or indirectly, at least 75% of its gross value from UK land, effectively the change will have an impact only on such holdings.
The change is not unexpected since the UK has been looking to renegotiate its treaty with Luxembourg since April 2019, when it introduced tax on capital gains for non-residents investing in UK commercial land. Structures put in place post-2019 may have anticipated such a change, so the revised treaty may therefore have a greater impact on structures put in place before 2019. Any capital gain accruing from as early as April 2019 may be brought into charge, not just the capital gain accruing from the time the new treaty comes into force. Any Luxembourg entity looking to dispose of an indirect interest in UK land in the near future will need to be mindful of the imminent introduction of the revised treaty.
The change will not take place before 1 April 2023. Both jurisdictions will need to bring the new treaty into force before the treaty will have effect. The treaty sets out the dates that the changes take effect once both jurisdictions have gone through the ratification process. The start dates are in the year following the ratification; for UK capital gains tax changes take effect from 6 April, and for UK corporation tax the date is 1 April.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.