By Emmanuel Galifer – Partner

The new tax treaty between France and Luxembourg, which was signed on March 20, 2018, takes into account the latest international standards and OECD’s developments and leads to a total revision of the applicable provisions between the two countries, which are not without consequences for the real estate industry !

  • Withholding tax on distributions: increase of the applicable rates

As from the entry into force of the new provisions:

–  Regarding distributions realized by companies subject to corporate income tax under standard conditions, there is no French withholding tax if the recipient is a tax resident and holds directly at least 5% of the capital of the distributing company during one year. If there is no such holding, a 15% withholding tax is levied.

– Regarding distributions realized by an investment vehicle such as SIIC / OPCI:

  • Application of a 15% withholding tax on dividends paid from income or gains derided from real estate assets by an investment vehicle which distributes annually the main part of its income, and whose income or gains derided from such real estate assets are exempt from taxes, to a tax resident recipient holding, directly or indirectly, less than 10% of the investment vehicle.
  • In case of a holding of more than 10% of the investment vehicle, the withholding tax is levied at the standard rate of 30% (rate which will be reduced with the decrease of the corporate income tax rate) or 15% (in case of holding by a Luxembourg mutual fund equivalent to certain French mutual funds (including OPPCIs)).
  • Until the entry into force of the new provisions, distributions made by investment vehicles such as SIIC / OPCI to Luxembourg companies remain subject to a 5% withholding tax, if the recipient holds a participation of at least 25%.

In addition, the definition of dividends is amended to take into account deemed dividend distributions.

  • Real estate capital gains: a real evolution

The provisions concerning the taxation of capital gains are amended and provide that capital gains on shares of real estate companies are taxable in the State where the real estate assets are located, if the value of the structure sold is or has been derived, directly or indirectly, for more than 50% from real estate assets located in that State, at any time during the year preceding his alienation.

However, real estate assets allocated by the company to its own business activity are not taken into account for the computation of the ratio.

  • Definition of tax residence: alignment with the OECD model

The definition of the tax residence is amended to take account of the effective liability to tax, and thereby complying with the OECD definition of tax residence.

  • Entry into force

The new tax treaty would apply as from January 1st, 2019 at the earliest, depending on the ratification process.