New Amendment to the Tax Convention France-Luxembourg: What Consequences for Investors in French Real Estate?

A fourth amendment to the Franco-Luxembourg Tax Convention, adopted in Paris in September 2014, assigned the exclusive right to tax capital gains on sale of real estate companies of securities to the State where the property is situated. However, as its entry into force is conditional upon ratification and the exchange of notifications by both French and Luxembourg parliaments, the amendment shall not come into force before 1st January 2017 at the earliest. Investors will benefit from the double exemption of capital gains on the disposals of real estate companies shares during an additional year.

Convention France-Luxembourg | Hance Law Firm

1. Regime

This amendment adds to Article 3 of the Convention a paragraph 4 as follows :

“The gains from the alienation of shares or other rights in a company, trust or any other institution or entity whose assets or property are established for more than 50 percent of their value or derive more than 50 percent of their value – directly or indirectly through the interposition of one or more other companies, trusts, institutions or entities – from immovable property situated in a Contracting State or rights to such property shall be taxable only in this state.”

As a result, sales of securities of French real estate companies (type SCI or SA) in a majority held by Luxembourg companies, including holdings (called Soparfis in Luxembourg), are taxable in France. These capital gains will thus be taxed in France under the general law and subject to the provisions of Article 244 bis of the CGI concerning the removal of the third (the current rate of 34.43%).

France and Luxembourg choose by this amendment to comply with the OECD Convention Model, which doesn’t not provide for the taxation of capital gains on disposal of marketable securities of companies in the State of location of the assignor.

Investors who wish to change their strategy in order to benefit from the advantages offered by the amended Convention will have to be cautious as French tax authorities carefully examine the operations to the implementation of the new tax treatment.

2. Application and Entry into Force

Those provisions shall apply to amounts taxable after the calendar year of entry into force of the amendment.
The effective date is a function of both the speed of the two states to ratify the amendment and the exchange of written notifications. That’s why the entry into force would have theoretically taken place on 1 January 2015 if both States had approved and promulgated it before the end of 2014.
However, France submitted the ratification bill to its National Assembly and referred it to the Foreign Affairs Committee on July 1, 2015 only. The discussion in open session concerning the ratification text of the amendment took place on 10 December 2015. The amendment must then be submitted to the Senate vote.
The Luxembourg Government has meanwhile tabled the approval of this amendment law before the Chamber of Deputies on June 9.
Following open discussions, the amendment was adopted but has not yet been notified. The bill still has to be ratified by the Grand Duke of Luxembourg and published in the official journal.
The amendment was supposed to take effect on January 1, 2016 provided that both French and Luxembourg parliaments had ratified it and exchanged their instruments of ratification before November 30, 2015.

As these conditions have not been fulfilled yet, the amendment will enter into force no earlier than 1st January 2017, subject to the fulfillment of all legal and administrative formalities before 30th November 2016.

Let’s talk

For more information on the fourth amendment to the tax convention France-Luxembourg , please contact Hance Law :

+352 274 404 / luxembourg@hance-law.com / www.hance-law.com

By | 2017-12-11T15:14:56+00:00 December 21st, 2015|Investment|