21.03.2018Christine Daric, Olivier Mesmin

The France-Luxembourg tax treaty has been signed!

The new tax treaty between France and Luxembourg was signed on 20 March 2018. This is the end of an era. The new treaty does not make mere cosmetic adjustments, but rather drastic changes to the tax relations between the two countries, and yet preserves – to say the least – France’s right to tax French-source income no matter what. As far as the real estate sector is concerned, the following changes are worth noting: new definition of tax residence, increased withholding tax rates on dividends paid out by REITs or OPCI vehicles to match the French domestic rate (30%) where the ultimate beneficial owner holds 10% or more of the capital (or a 15% withholding tax if he holds less than 10% of the capital), the right to tax capital gains on the sale of shares in companies dealing primarily in real estate in the country where its assets are located, even – which is a first – one year after the company has sold all its assets, the right for either country to tax dividends paid out of income that is tax-exempt in the other, the right to apply a withholding tax on deemed distributions, a particularly broad provision to prevent tax-avoidance schemes from exploiting the tax treaty, and a definition of ultimate beneficial owner and resident that may give rise to legal disputes.

The treaty will come into force on or after January 1st, 2019, if ratified by both countries in 2018.