On 20 March 2018, France and Luxembourg signed a new double tax treaty (the “Treaty”) based on the latest version of the OECD model convention and implementing BEPS minimum standards. The Treaty will facilitate various types of investments in France through Luxembourg funds; changes to taxation of certain real estate investment vehicles may, however, have an impact on some existing structures and require a restructuring.
The Treaty reduces the minimum shareholding threshold to 5% (with a minimum one-year holding period) in order to qualify for an exemption from dividend withholding tax. Another development concerns undertakings for collective investment: although not fulfilling the new subject-to-tax requirement in order to qualify as a “resident” for purposes of the Treaty, they may to a certain extent benefit from withholding tax reductions on dividends and interest.
The change in the Treaty will also impact investments in French real estate investment funds which are obliged to annually distribute most of their income and whose income or capital gains from real estate are tax exempt (e.g., French Organismes de Placement Collectif Immobilier or “OPCIs”). Dividends distributed by such an investment fund to a Luxembourg investor owning (directly or indirectly) a participation representing at least 10% of the investment fund’s capital, will no longer benefit from the reduced French withholding tax rate of 5%, but will instead be subject to the French ordinary withholding tax rate (currently 30%, to be reduced to 25% by 2022). In case the participation represents less than 10% of the investment fund’s capital, the French withholding tax rate will be 15%.
In addition, Luxembourg will no longer exempt from Luxembourg corporate income taxes dividends distributed by a French capital company to a Luxembourg capital company that holds directly at least 25% of the French company (previously also available to French entities not subject to tax such as OPCIs). Instead, Luxembourg will grant within certain limits a credit for the French withholding tax paid.
The Treaty implements the BEPS Action 6 “principal purpose test”, which aims at preventing treaty abuse.
The Treaty will become effective as of 1 January of the year following the year during which both France and Luxembourg have notified that ratification has been completed (i.e., 1 January 2019 at the earliest). Since many investments in French real estate have been made by Luxembourg tax resident entities, it is expected that the Treaty will have a significant impact. Taxpayers should assess whether they need to restructure existing investments before the Treaty enters into force, with particular focus on complying with applicable (French) anti-abuse rules.