France and Luxembourg have signed a new tax treaty on March 20, 2018
The French and Luxembourg governments agreed on a new bilateral tax treaty that will be in line with the BEPS recommendations. This new treaty could enter into force on 1 January 2019 if both Parliaments ratify it in 2018 and will have the following impacts:
Re-wording of the definition of permanent establishment (Article 4)
The new definition of permanent establishment is wide, in accordance with the BEPS recommendations (in particular with respect to the notion of dependent agent). The double taxation is avoided, according to Article 22, through a tax credit method and not the exemption method which is yet usually referred to in the double tax treaties signed by France.
Increase of the rate of withholding tax for distribution made by French REITs (Article 4 and 10)
Following the OECD model, the new tax treaty provides for a definition of resident as any person that is subject to tax in France or Luxembourg. Consequently, French REITs, especially OPCI, will no longer be resident for treaty purposes and their distributions will no longer benefit from the reduced 5% withholding tax, but will be subject to the domestic 30% withholding tax1.
A limited exemption is provided for certain investments funds, including French OPCI, for which a reduced rate of 15% will be allowed when the Luxembourg beneficial owner hold less than 10% in the OPCI or is a Luxembourg investment fund meeting certain criteria.
New definition of dividend (Article 10)
The new treaty includes a wider definition of dividends that covers any distribution which is treated as dividend for tax purposes by the country of source. In practice it means that any payments qualified as deemed dividends will now be subject to withholding tax.
Article 10 provides for a zero WHT when the beneficiary owner of the dividends holds at least 5% of the distributing company (instead of a 5% WHT for a minimum stake of 25% under the current version).
New definition of capital gain on shares in real estate company (Article 13)
Under the new treaty, the gain made by a Luxembourg resident will be fully taxable in France when, at any time during the 365 days preceding the disposal, the disposed shares or similar rights derive more than 50% of their value directly or indirectly from immovable property situated in France (the real estate assets used in the frame of an industrial or commercial activity by the owner itself are not taken into account for the determination of the 50% ratio).
Introduction of a substantial participation clause on capital gains made by individuals (Article 13)
The new treaty provides for specific rules that allows the State of residence of the company to tax the capital gains from the alienation by individuals of shares or interests that are part of a substantial participation, i.e. where the seller and affiliated persons own directly or indirectly shares or comparable interests giving right to 25% or more of the profits of the said company and was, at some point of time during the 5 years preceding the sale, a resident of the State in which the Company is a resident
New anti-abuse rules: principal purpose test (Article 28)
The principal purpose test as set out in the OECD model has been included into the new treaty. This test aims at denying the benefit of the treaty when it can be demonstrated, based on facts and circumstances, that obtaining the benefit of the treaty was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. This subjective test could however be discarded when it is established that the said arrangements or transactions are in accordance with the object and purpose of the relevant provision of the treaty.
In addition, the Protocol specifically provides the list of French anti abuse rules that the treaty cannot help to avoid (e.g. limitation of deductibility of interest, anti-tax havens provisions, taxation of French activities realized by foreign entities, etc.).
The impact of the new tax treaty on currently existing structures, especially when involving French OPCI held by Luxembourg shareholders, may be significant and, as mentioned, the entry into force is expected as from January 1, 2019.
About White & Case Luxembourg country practice
White & Case has recently launched a Luxembourg country practice. The launch of our Luxembourg practice builds on the Firm's global strengths, and is an important strategic development of our capabilities to provide clients with comprehensive one-stop legal support on their most complex, cross-border matters. Local partners Vincent Naveaux, Christophe Balthazard and Christophe Goossens, have recently joined White & Case in Brussels, and will work with partner and practice head Thierry Bosly on our Luxembourg country practice. This new team has more than 50 years of combined experience advising on deals and disputes involving Luxembourg, including mergers and acquisitions, joint ventures, reorganizations and restructurings, tax, risk advisory and corporate litigation and pre-litigation matters.
About White & Case Paris office
White & Case in Paris assists clients seamlessly across all domestic and international operations, transactions or disputes. Deep knowledge of legal, regulatory and economic environments gives us unrivalled familiarity with the intricate legal issues that our clients face. With extensive experience in structuring innovative solutions, our teams navigate clients through their most complex challenges and help them assess and overcome commercial, legal, regulatory and structural risks.
If you have any questions or if would like to learn more about how this treaty will impact your business please do not hesitate to contact our tax advisors; Alexandre Ippolito, Partner and Head of Tax EMEA, Norbert Majerholc, Partner and Head of Tax Paris, Thierry Bosly Partner and Practice Head Luxembourg and Christophe Goossens Tax Partner Luxembourg.
1 To be progressively decreased up to 25% in 2022.
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