New Double Tax Treaty Between France And Luxembourg: Substantial Impact On Real Estate Investors

On 20 March 2018, the governments of France and Luxembourg signed a new double tax treaty ("New Treaty") replacing the current treaty dated 1 April 1958 ("Old Treaty").

The Old Treaty was in force for almost six decades and had been amended several times (the 4th and latest amendment of the Old Treaty entered into force only last year) These amendments were necessary in particular to accommodate OECD developments in the field of the exchange of information and to close a well-known loophole resulting from the divergent interpretations of Luxembourg and French case law on income derived from French real estate by a Luxembourg company. Nevertheless, Luxembourg remained a hub for structuring French real estate investments through Luxembourg funds. The New Treaty contains substantial derogations from the 2017 OECD Model Tax Convention ("OECD MTC").

The main differences between the Old Treaty and the New Treaty may be summarised as follows:

Residence

The residence definition generally follows article 2 OECD MTC, but is completed by the following precisions:

in the case of France, residents include partnerships (société de personnes), groups (groupement de personnes) or similar entities: whose place of effective management is situated in France; which are subject to tax in France; and whose unitholders, partners or members are, pursuant to French tax law, personally liable to tax on their portion of profits of these partnerships, groups or similar entities; a trustee or fiduciary is not considered a resident of a Contracting State even if covered by the definition of a resident, to the extent that it is only the apparent beneficiary of the income, while such income benefits in fact, directly or indirectly through the intermediary of other individual persons or companies, another person which does not qualify as a resident of one of the Contracting States. Pursuant to the protocol to the New Treaty ("Protocol"), it is understood that an undertaking for collective investments ("UCI") that is resident in a Contracting State and assimilated under the laws of the other Contracting State to a domestic UCI, benefits from articles 10 (dividends) and 11 (interest) for the portion on the income corresponding to the entitlements of residents of either Contracting State or of a State with which the source State has concluded a treaty on administrative assistance for the purpose of preventing tax evasion and avoidance. The situation of UCIs is improved...