The income and capital tax treaty between Ethiopia and Luxembourg was signed on 29 June 2021. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ethiopian tax on income and profit, and the tax on income from mining, petroleum, and agricultural activities. It covers Luxembourg income tax on individuals, corporation tax, capital tax, and communal trade tax.

Withholding Tax Rates

• Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise, 10%
• Interest - 5%, with an exemption for interest paid by/to or guaranteed by:
  • the Government of a Contracting State, or a political subdivision or a local authority thereof; or
  • the Central Bank of a Contracting State; or
  • the export financing agency of a Contracting State
• Royalties - 5%
• Fees for technical services in consideration for any services of a technical, managerial, or consultancy nature - 7.5%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
• Gains from the alienation of shares or comparable interests deriving if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in the other State.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Ethiopia applies the credit method for the elimination of double taxation, while Luxembourg generally applies the exemption method. However, Luxembourg applies the credit method in respect of certain income covered by Articles 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Fees for Technical Services), 14 (Capital Gains), 18 (Entertainers and Sportspersons), and 22 (Other Income).

Entitlement to Benefits

Article 29 (Entitlement to Benefits) provides that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will apply in Ethiopia from 8 July next following the date of its entry into force and in Luxembourg from 1 January of the year following its entry into force.