November 23, 2015
On September 8, 2014, we issued a client alert that the Luxembourg and French Ministry of Finance had signed a fourth amendment to the tax treaty between France and Luxembourg, with the potential to impose a significant tax burden on existing and future French real estate investments.[1] Although the effective date for the amendment was previously unclear, it is now apparent that this amendment will come into effect no earlier than January 1, 2017.
Under the current treaty, gains on the sale by a Luxembourg company of shares in a French or Luxembourg company holding French real estate are not taxable in France, even if those gains may also be exempt from Luxembourg tax under Luxembourg domestic law.
The fourth amendment will reverse this favorable treatment. It will grant France the right to tax capital gains on the sale of shares by a Luxembourg resident investor in any type of French or Luxembourg company that owns predominantly French real estate assets, including an SA (société anonyme), SAS (société par actions simplifiée), SARL (société à responsabilité limitée) and SCI (société civile immobilière). Under the amendment, an entity is a predominantly French real estate entity if more than 50% of its value derives directly or indirectly from French real estate assets. Real estate assets that form a part of the entity’s own business activity (such as the real estate that forms part of the operation of a hotel) are not taken into account for purposes of this provision.
We have now learned that the amendment will be debated in the French National Assembly on December 10, 2015. As a result, France will not be in a position to provide formal notification of the implementation of the amendment until after November 30, which was the deadline for the amendment to apply in 2016. Due to the entry into force provisions of the amendment, the amendment will only tax transfers of French or Luxembourg real estate property companies beginning on January 1, 2017, at the earliest.
Please find below an unofficial translation of the amendment for information purposes:
"Article 3 of the Treaty is completed by the following paragraph 4:
4. Gains deriving from the transfer of shares, units or other rights in a company, trust, institution or any other entity, holding assets or goods the value of which derives by more than 50% – directly or indirectly through the interposition of one or several other companies, trusts, institutions or entities – from real estate assets located in the Contracting State or from rights on such assets, are only taxable in such State. For the purpose of such provisions, real estate assets assigned by such a company to its own business activity are not taken into account.
The aforementioned paragraph also applies to the transfer by an enterprise of such shares, units or other rights.
The two aforementioned paragraphs do not contravene the application of the directive 2009/133/CE relating to the tax regime applicable to mergers, demergers, partial demergers, contribution of assets and share exchange with respect to companies which are resident in different Member States nor to the transfer of the statutory seat of European companies (SE – société européenne) or European cooperative companies (SCE – société cooperative européenne) from one Member State to another.
Article 2
1. Each of the Contracting State must notify the other of the implementation of the applicable formalities in order for such amendment to enter into force. Such amendment shall enter into force the first day of the month following the day on which the last such notification is made.
2. The provisions of the amendment apply:
a. With respect to income taxes collected by way of withholding tax, to income taxable the year following the calendar year during which the amendment has become applicable;
b. With respect to income taxes which are not collected by way of withholding tax, to income relating to, as the case may be, the calendar year or any financial year starting after the calendar year during which the Amendment has become applicable;
c. With respect to other contributions, to taxes to which the triggering event has occurred after the calendar year during which the Amendment has become applicable.
3. The amendment shall remain applicable as long as the Treaty applies."
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[1] "Renegotiation of the France and Luxembourg Tax Treaty: Taxation of Real Estate Capital Gains Now Expanded by Way of a September 5, 2014 Amendment to the Treaty" (September 8, 2014).
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, Jérôme Delaurière or Jeffrey Trinklein, or any of the following lawyers:
Jérôme Delaurière – Paris (+33 (0)1 56 43 13 00, [email protected])
Jeffrey M. Trinklein - London/New York (+44 (0)20 7071 4224 / +1 212-351-2344), [email protected])
Nicholas Aleksander – London (+44 (0)20 7071 4232, [email protected])
Hans Martin Schmid – Munich (+49 89 189 33 110, [email protected])
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