The Luxembourg and French Finance Ministers signed a new protocol to the Luxembourg-France Tax Treaty on 5th September 2014.

What is the new protocol about?

This protocol adds a fourth paragraph to the Tax Treaty’s Article 3 on income and gains from immovable property allocating the exclusive right to tax capital gains realized on the disposal of stock, shares, and other corporate rights in a “real estate entity” to the Contracting State where the immovable property is located.  The protocol states that the application of this new provision will not contravene with the application of the Merger Directive. 

What is a “real estate entity” according to the new protocol?

The “real estate entity” can be a company, a trust, a partnership, or any other type entity which (i) holds assets or property consisting of more than 50% of the value of immovable property or rights on immovable property situated in a Contracting State; or (ii) is deriving more than 50% of its value directly or indirectly from immovable property or rights on immovable property situated in a Contracting State. 

Immovable property used to conduct the entity’s business is not taken into account when assessing the real estate assets’ predominance.

When does the new protocol enter into force?

Even though the protocol has been signed, it has not entered into force yet.  Both countries still have to notify each other about the completion of the procedure required for amending its national legislation. It should, however, be noted that such protocol would enter into force the month following completion of the ratification process and would apply to taxes levied or withheld the year after its entry into force.