On 2 July 2019, the Luxembourg Parliament ratified the new double tax treaty and accompanying protocol signed between Luxembourg and France on 20 March 2018. France has already ratified this treaty. The treaty will become effective as of 1 January 2020, provided Luxembourg and France exchange their instruments of ratification before 31 December 2019.
The new treaty is in line with the 2017 version of the OECD model convention and the Multilateral Convention to Implement Tax Treaty Related Measures (the “MLI”), ratified by both Luxembourg and France, which implements BEPS minimum standards.
The new treaty will facilitate various types of investments in France through Luxembourg fund entities. At the same time, changes to the taxation of distributions by certain French real estate investment vehicles may impact existing structures and require a restructuring. For a detailed outline of the changes we refer to our newsletter of 22 March 2018. The following consequences of the new treaty deserve particular attention:
- The Treaty introduces a withholding tax exemption for dividends derived from qualifying participations of at least 5% held for at least 365 days.
- Dividends distributed by French real estate investment funds which are obliged to annually distribute most of their income and which are exempt from tax on income or capital gains from real estate (typically established as Organisme de placement collectif en immobilier or “OPCIs” or as Société d'investissement immobilier cotée or “SIICs”) will no longer benefit from a reduced 5% withholding tax rate. Instead, they will be subject to the French ordinary domestic withholding tax rate (currently 30%, to be reduced to 25% by 2022) if the Luxembourg beneficiary holds 10% or more of the share capital of the distributing fund. In case the participation represents less than 10% of the investment fund’s capital, the withholding tax rate will be capped at 15% under the treaty.
- Undertakings for collective investment (“UCIs”) established in Luxembourg or in France and assimilated to a UCI in the other contracting State will under certain conditions be entitled to treaty benefits regarding withholding tax on dividends and interest.
- The treaty will no longer provide for an exemption for dividends distributed by a French capital company to a Luxembourg capital company. This exemption was also available to French entities not subject to tax such as OPCIs and SIICs. Instead, Luxembourg will grant within certain limits a credit for the French withholding tax paid.
- The new treaty implements the BEPS Action 6 “principal purpose test”, which aims at preventing treaty abuse.
As detailed above, the new treaty introduces significant changes compared to the existing treaty, notably concerning the taxation of income received by Luxembourg entities from French real estate investment funds (e.g., OPCIs and SIICs). Luxembourg taxpayers should assess whether they need to restructure existing investments in French real estate before the new treaty enters into force.