France is seeking to remove the tax benefits of real estate structuring using Luxembourg-based funds by an amendment to the existing treaty.
France has formally asked Luxembourg to renegotiate the double tax treaty with France so that a capital gain realised upon the sale by a Luxembourg company of shares in a French real estate-oriented company would become taxable in France. According to our information, Luxembourg has accepted the principle of the discussions, and drafting the amendment to the tax treaty could soon be finalised. We do not know as yet how a real estate-oriented company would be defined for these purposes. We understand that France would like to have the new amendment ratified in the course of 2012.
The current double tax treaty dates from 1958, and it provides for capital gains resulting from the sale by a Luxembourg company, which does not have a permanent establishment in France, of shares in a company owning real estate in France to be taxable in Luxembourg and exempt in France under certain conditions. In practice, such gains remain exempt from tax because Luxembourg considers that they are taxable only in France. In consequence, for several years, most of the funds investing in real estate properties in Europe are based in Luxembourg, which offers several advantages, but in particular tax ones. Such structures would be affected if this modification were to enter into force. This is not the first attempt by France to close the loophole in this area. However, it seems that this time, Luxembourg may face difficulties in resisting the economical and political pressure to change.