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New France-Luxembourg DTA...

 21 March 2018

New France-Luxembourg DTA...   

Well this time, it's done!  

 The new France-Luxembourg Double Tax Treaty (DTA) has been agreed between the two states. 

Although the DTA has not been officially released, it doesn't seem to bring unexpected changes (subject to the final document to be officially published).

However and as expected, it won't be without impact as regards real estate activities!

Real estate holding structures, in particular OPCI

To date, the taxation applicable to the income flows derived from French real estate assets held, whether directly or indirectly, by a Luxembourg investor has been as follows:

 

* CT (corporation tax) in France at the standard rate (33.1/3% reducing to 25% in 2022).

** WHT (withholding tax) in France on dividends paid to the shareholder in Luxembourg. Rate varies according to the conditions of holding and the nature of the entities involved.

*** Levy due on the capital gain, chargeable against the CT due. The rate of the levy is aligned with that of CT, i.e. gradually reducing to 25% by 2022.

The new DTA introduces a less favourable regime, mainly for SPPICAV, for which there is a specific provision (applying the relevant principles of recent tax treaties concluded by France):

* CT (corporation tax) in France at the standard rate (33.1/3% reducing to 25% in 2022).

*** Levy due on the capital gain, chargeable against the CT due. The rate of the levy is aligned with that of CT, i.e. gradually reducing to 25% by 2022.

Thus we see that, in the case of a SPPICAV held by investors with less than 10% of the capital, the overall tax is set at 30%, reducing to 25% by 2022; the main difference between the structures is the taxation of either (i) taxable income calculated at the level of the property companies or (ii) solely to income in the form of dividends (SPPICAV).

However, in some cases, WHT under French law may be reduced (this is simply through the application of domestic law, without reference to the DTA), especially if the investor is an “eligible” investment fund.

More specifically, subject to the existence of an “eligible” investment fund, withholding tax:

  • will not apply, or
  • will apply at the rate of 15% if the entity distributing the dividend is a SIIC [listed real estate investment company] or a SPPICAV.

For an investment fund to qualify as “eligible”, it must:

  • be located in a EU Member State or in another state or territory that has concluded an administrative assistance agreement with France to combat fraud and tax evasion (allowing France to check as necessary with the other state that the following conditions are met),
  • meet the following two conditions:
    - raise capital from a certain number of investors for investment purposes according to an investment policy that is in the interests of these investors;
    - have similar characteristics to certain OPC [pooled investment vehicle] under French law, namely:
       ›OPCVM [UCITS]; or
       ›certain alternative investment funds open to non-professional investors, i.e. general purpose investment funds, capital investment funds, OPCI, SICAF [closed-end investment funds] or funds of AIFs, with the exclusion of SCPI [real estate investment trusts] and forestry savings companies; or
       ›alternative investment funds open to professional investors (authorised funds: general purpose professional funds or OPCI / reported funds: FPS, FPCI, SLP); or
       ›employee savings funds.

It is important to note that this rate reduction stems from domestic law, as under the new definition of “resident” in the DTA (a definition that includes the standard definition found in modern DTA), only companies actually subject to tax (without being exempted) may claim the benefit of the DTA’s provisions.

Thus a French pooled investment vehicle may no longer claim application of the DTA owing to its status as a tax-exempt entity (which was not the case under the previous DTA, which was applicable to all companies whose effective management centre was located in one of the two states, without reference to the tax status of the company).

The result is that, unless there is a reduction or exemption under French domestic law, the standard rate of WHT will apply to distributions of dividends (30%, gradually reducing to 25% by 2022).

Anti-abuse provisions

Taking its cue from the multilateral convention established by the OECD following the work on base erosion and profit shifting, which is soon to be introduced (currently undergoing ratification by France), article 28 of the new France-Luxembourg DTA provides that application may be refused if it can be established that the parties have set up a scheme where one of the main aims is to benefit from the favourable provisions of the DTA (the anti-treaty shopping provision).

Similarly, article 4.5 provides that application of the DTA may not be claimed by a person who is only the apparent recipient of income that actually benefits a third party (who would then be the economic beneficiary) and who is not a resident of Luxembourg.

Wealth tax on individuals

One piece of good news introduced by this agreement is that it incorporates the principles existing in the present DTA. As a result, a Luxembourg resident will not be subject to French wealth tax except on those real estate assets that it directly owns in France.

On the other hand, such person will be not taxable in respect of real estate owned indirectly, whether through companies whose assets are predominantly made up of French real estate assets or otherwise.

While the scope of wealth tax has been significantly expanded for non-residents, residents of Luxembourg are however protected!

Entry into force

The new France-Luxembourg DTA will enter into force following the exchange of the ratification instruments between the two states and will apply from the subsequent calendar year.

It is thus quite possible that it will be introduced as from 1 January 2019! 

ampoule 

Faced with this change, some investors may be tempted to change their structures without delay in order to benefit from a more favourable regime. Following previous changes to the France-Luxembourg DTA, the French tax authorities have not hesitated to challenge, on the basis of the abuse of rights, any restructuring that appears solely to be motivated by tax considerations... and such actions have largely been successful, with the adjustments confirmed by the courts!

  

By Pierre Appremont & Paméla Le Jeune

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