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Treaty between Luxembourg and Bahrain – details

Details of the income and capital tax treaty between Luxembourg and Bahrain, signed on 6 May 2009, have become available. The treaty was signed in the Arabic, English and French languages each text having equal authenticity. The treaty generally follows the OECD Model Convention (2008).

The maximum rates of withholding tax are:

-   10% generally, but 0% if the receiving company holds directly at least 10% of the capital of the company paying the dividends (Art. 10(2)(a)-(b));
-   0% on interest (Art. 11(1)); and
-   0% on royalties (Art. 12(1)).

Deviations from the OECD Model include:

-   the term permanent establishment includes (i) a refinery; (ii) a sales outlet; and (iii) a warehouse in relation to a person providing storage facilities for others (Art. 5(2)(g)) and (i));
-   a building site or construction or installation project constitutes a PE only if it lasts more than 12 months (Art. 5(3));
-   profits from the operation of ships or aircraft in international traffic include: (i) profits from the rental on a bareboat basis of ships or aircraft; and (ii) profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise (Art. 8(2)(a) and (b));
-   pensions and other payments made under the social security legislation of a Contracting State are only taxable in the Source State (Art. 18(2)); and
-   pensions and other similar remunerations (including lump-sum payments) arising in a Contracting State and paid to a resident of the other Contracting State will be taxable only in the Source State if the following conditions are met: (i) the payments derive from contributions paid to or from provisions made under a pension scheme by the recipient or on his behalf; and (ii) the contributions, provisions or pensions have been subject to tax in the Source State under its normal tax rules (Art. 18(3)).

Bahrain applies the ordinary credit method and exemption with progression method for the avoidance of double taxation (Art. 22(1) (a) and (b)).

Luxembourg applies the exemption-with-progression method and for business profits, dividends, royalties and income derived by artists and sportsmen the credit method to avoid double taxation (Art. 22(2) (a) and (b)). Furthermore, Luxembourg will exempt dividends derived by a Luxembourg company owning directly at least 10% of the capital of the Bahrain company paying the dividends if:

-   the Luxembourg company owns the shareholding since the beginning of the accounting year; and
-   the Bahrain company is subject to an income tax corresponding to the Luxembourg corporate income tax (Art. 22(2) (c).

The exemption-with-progression method will not apply with respect to income derived and or capital owned by a resident of Luxembourg which is exempt in Bahrain based on the provisions of the treaty, or subject to the 0% or 10% dividend withholding tax (Art. 22(2) (d).

Neither treaty party can terminate this treaty during a period of 5 years starting from the date of its entry into force (Art. 28(1)).

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