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

The Luxembourg and French Ministry of Finance signed on September 5, 2014, a fourth amendment to the tax treaty between France and Luxembourg. 

The amendment, which has been released this morning, gives the State where real estate assets are located the right to tax capital gains on the sale of shares in real estate property companies if the real estate assets are held indirectly by individuals or enterprises of the other State.  

The purpose of the amendment is to expand France’s right to tax capital gains from the indirect sale of French real estate.  Under the current treaty, capital gains from the sale of shares in a French or Luxembourg company holding French real estate are not taxable in France under the treaty, even if those share gains can also benefit from exemptions in Luxembourg under Luxembourg domestic law.

The amendment grants France the right to tax capital gains on the sale or transfer of shares by a Luxembourg tax resident investor in any type of French or Luxembourg company with predominantly French real estate assets, including e.g. SA (société anonyme), SAS (société par actions simplifiée), SARL (société à responsabilité limitée) and SCI (société civile). 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 hotel activities) are not taken into account for purposes of this provision.

The amendment will enter into force on January 1st of the calendar year following its ratification by both States (in the case of income taxes levied by deduction at source) or to financial years opened after the calendar year following the ratification (in the case of income taxes not collected by deduction at source).

If each State ratifies the amendment before January 1st, 2015, the amendment would therefore apply to capital gains realized on or after such date.            

The timing of the ratification process should give clients some time to anticipate and mitigate the entry into force of these new treaty provisions with respect to existing Luxembourg-based investments.

With the release of this amendment, one might expect that several French real estate property companies owning mature French real estate assets could be put up for sale in the coming weeks. The amendment will also likely prompt a growing use by investors of tax-favored real estate vehicles such as OPCI (organisme de placement collectif en immobilier), which are not taxed on real estate income so long as they comply with certain profit distribution requirements.

 Please find below an unofficial translation of the amendment for information purposes:

"Article 3 of the Treaty is completed by a paragraph 4 drafted as follows:

 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. 

1.    Each of the Contracting State informs 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 of 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."