On 29 January 2024, the Grand Duchy of Luxembourg and Montenegro signed a treaty for the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance (the “DTT”). The DTT was approved by the Grand Duchy of Luxembourg by the law of 18 December 2024. As the conditions for the entry into force of the DTT were fulfilled on 24 September 2025, the DTT entered into force for both contracting states on 1 October 2025, in accordance with Article 28 (1) of the DTT.
Withholding taxes
Withholding taxes on dividends paid to beneficial owners who are resident in the other contracting state cannot exceed 5%, if the beneficial owner is a company that holds, directly or indirectly, at least 10% of the capital of the paying company. In all other cases, the withholding tax on dividend distributions shall not exceed 10%.
Withholding taxes on interest payments made to beneficial owners in the other contracting state cannot exceed 10%. The DTT also foresees a withholding tax exemption for interest payments in very limited situations (e.g. interest payments to financial institutions or to the state itself as well as to any of its political subdivisions).
Withholding taxes on royalty payments made to beneficial owners in the other contracting state cannot exceed 5% (for the use or licence of the use of a copyright in a literary, artistic or scientific work) or 10% in certain cases (e.g. for the use or licence of a patent, trademark, design or model). On this point, the DTT diverges from the OECD model convention, which generally provides for exclusive taxation of royalties in the residence state only.
Capital gains
The DTT provides that:
- capital gains from the disposal of immovable property are taxable in the contracting state where such immovable property is located;
- capital gains from the disposal of ships or aircraft operated in international traffic or movable property used in the operation of such ships or aircraft shall be taxable only in the contracting state in which the place of effective management of the company is located.
For capital gains arising from the disposal of any property other than that referred to above, the DTT provides that they are taxable only in the contracting state where the alienator is a resident, i.e. no real estate rich clause has been inserted in the DTT.
Elimination of double taxation
In general, Luxembourg will apply the exemption method for the purpose of eliminating double taxation for most types of income. In certain situations, like dividends, interest, royalties and entertainers' and sportspersons' income, Luxembourg will apply the credit method.
Entitlement to benefits
As recommended by the OECD model convention, the DTT includes an entitlement to benefits clause, which however remains limited, by solely including a principal purpose test and foreseeing the possibility of discretionary relief.
Certain collective investment vehicles may benefit from the DTT
The governments of Luxembourg and Montenegro agreed, in a protocol to the DTT, that they will consider any collective investment vehicles which are established in a contracting state and are treated as a body corporate for tax purposes in that contracting state as residents and as the beneficial owner of the income they receive for the purpose of the DTT. Likewise, collective investment vehicles which are established in a contracting state and are not treated as a body corporate for tax purposes shall be considered as resident individuals and as the beneficial owner of the income they receive for the purpose of the DTT.
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