The French and Luxembourg Finance Ministers signed, on 5 September 2014, a Protocol amending Article 3 (the “Protocol”) of the France-Luxembourg double tax treaty for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance with respect to taxes on income and fortune (the “Tax Treaty”).

The Protocol aims at introducing a new provision in Article 3 of the Tax Treaty relating to the taxation of capital gain on participation in “real estate-rich” companies (sociétés à prépondérance immobilière).

Pursuant to the paragraph introduced in the Tax Treaty by the Protocol, the right to tax capital gains derived by a resident of a Contracting State from the alienation of stocks, shares or similar rights in a company, a trust or any other institution or entity whose assets or property constitute more than 50 per cent of their value, or which derive more than 50 per cent of their value – directly or indirectly via the interposition of one or more companies, trusts, institutions or entities – from immovable property situated in another Contracting State is attributed to that other State.

The Protocol will therefore have a significant impact for almost all Luxembourg structures that invest predominantly in French real estate. The existing structures were indeed very often implemented with the structuring anticipation that - at least - an indirect disposal would not suffer any taxation.

Under the Protocol, any capital gains realised on the sale by a Luxembourg entity of shares or similar instruments in a French/Luxembourg/other entity the main asset of which is French real estate will be taxable in France. The main exclusion to this new rule concerns the case of a company which uses the real estate for its own enterprise activities. This will most likely not include the mere leasing of the building.

The Protocol has yet to be approved by the respective Parliaments of France and Luxembourg and will probably enter into force on 1 January 2015 or 1 January 2016, depending on the delay of ratification in each country. It is however to be carefully noted that, in case the Protocol enters into force on 1 January 2015, taxpayers will have a very limited timeframe in order to review their structure and the potential impact that the Protocol may have on it.