Luxembourg: Luxembourg signs new protocol to treaty with France
The long awaited protocol to the France-Luxembourg double tax treaty (DTT) was signed on September 5 2014. The protocol amends the rules applicable to capital gains on the sale of shares or other rights in real estate companies and allocates the right to tax these gains to the source country. The protocol provides that capital gains derived by a resident of Luxembourg or France from the alienation of shares, units or other rights in companies, trusts or any other entities that derive directly or indirectly more than 50% of their value from real estate assets located in the other contracting state are taxable in the source country (the country in which the real estate is located). In other words, these gains are taxed in the same way as real estate income. Real estate assets allocated to the business activity of an enterprise are excluded from this clause.
So far, under the existing DTT provisions, capital gains realised on the sale of shares in real estate companies were taxed at the place of the residency of the seller. In other words, gains derived by a Luxembourg company from a French property company holding French real estate were exempt in France and only taxable in Luxembourg. In Luxembourg, they could possibly benefit from the Luxembourg participation exemption regime. With the new provisions of the protocol, capital gains derived by a Luxembourg company from a French property company will become taxable in France.
Furthermore, particular attention has to be paid to the wording of this new provision. The wording goes beyond the recommendations of the OECD in its Model Tax Convention. While the latter covers only capital gains on the alienation of shares or comparable interests, the protocol covers shares as well as any other rights.
The amendment to the France-Luxembourg DTT will require a careful review of existing investment structures in French real estate so as to mitigate any potential adverse tax consequences. If both countries manage to complete the ratification procedures before year-end, the protocol will enter into force on January 1 2015, which means that clients with real estate investment structures in France or which plan to invest in French real estate should seek advice from their tax adviser quickly.
ATOZ – Taxand Luxembourg
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