A Luxembourg Holding Company

A Luxembourg Holding Company

April 01, 2004 | By Keith Martin in Washington, DC

A Luxembourg holding company qualified for a 5% withholding rate on dividends paid to it by a US subsidiary.

A parent company in Holland used the Luxembourg holding company to hold all of its subsidiaries outside Holland, including a subsidiary in the United States.  Ordinarily, dividends paid by US companies are subject to a 30% withholding tax at the US border.  The rate is often reduced by tax treaties.  It is 5% under the US-Luxembourg tax treaty, but usually only for dividends paid to Luxembourg individuals, government agencies and publicly-traded companies.  However, the IRS ruled privately in this case that the 5% rate would apply because of a special clause in the treaty that gives the benefit of the 5% rate to private Luxembourg companies in which at least 95% of the shares are “ultimately owned” by residents of other European Union countries with which the US has comprehensive income treaties.  The US has such a treaty with Holland.

The IRS said that worked: the parent company in Holland was the “ultimate” owner of the shares so that it was not necessary to look through it to inquire about the tax residences of its shareholders.

The ruling is Private Letter Ruling 200409025.  The IRS made the text public in March.

Keith Martin