Luxembourg: New France-Luxembourg Double Tax Treaty

Last Updated: 28 December 2018
Article by Samantha Schmitz-Merle, Marie Bentley and Romain Tiffon

 On 20 March, 2018, France and Luxembourg signed a new Double Tax Treaty ("DTT"), which was released yesterday. The aim of the new DTT is to replace the existing one that was signed in 1958, and amended 4 times since then. The DTT follows the structure and, for the most part, the content of the 2017 OECD Model Tax Convention.

This tax alert provides an overview of the main provisions of the DTT, which will, in particular, bring along important changes regarding the taxation of real estate investments made by Luxembourg companies through dedicated French investment vehicles.

New Preamble and Principle Purposes Test

In line with the latest version of the OECD Model Tax Convention and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"), the following preamble is included in the DTT: the aim of the DTT is the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements).

In addition, in order to address some forms of treaty abuse, the DTT contains a principal purposes test ("PPT") in accordance with Actions 6 and 15 of the Base Erosion and Profit Shifting ("BEPS") Action Plan, and in line with the guiding principle of paragraph 9.5 of the Commentary included in 2017 OECD Model Tax Convention. Under this PPT, a DTT benefit will be denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction (subjective test). However, DTT benefits will still be granted if it can be demonstrated that granting such benefits, in the circumstances at hand, would remain in accordance with the object and purpose of the relevant provisions of the DTT (objective test). Given the complexity in interpreting and applying this provision which will have to be read in conjunction with EU law (as defined at several occasions by the Court of Justice of the EU), it is recommended to seek advice from a tax adviser when setting up cross-border investments.

Persons Covered and Tax Residence

As far as persons covered are concerned, tax transparent entities (partnerships) are excluded from the qualification of person for the DTT purposes. Nevertheless, the DTT could be applied to France or Luxembourg source income derived through a transparent entity located in Luxembourg or in a third State having concluded with the source State a convention on administrative assistance, subject to the condition that the tax transparent treatment of the partnership is also recognised by the third State. French partnerships subject to tax in France are excluded from this provision and are treated as tax residents of France for the purpose of the DTT.

As far as tax residence is concerned, the DTT amends the existing rules applicable in cases of conflict of company residence and provides that a company is considered as resident in the State in which its effective place of management is located.

Application of some DTT provisions to Collective Investment Vehicles ("CIVs")

Contrary to the current version of the tax treaty, the DTT expressly states (in its Protocol) that it will apply to CIVs under certain conditions. This approach is notably compliant with the OECD report "The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles". The Protocol to the DTT provides that a CIV established in a Contracting State, to the extent it is assimilated to a CIV under the legislation of the other Contracting State, may be granted some of the DTT benefits under certain conditions. The CIV (e.g. a Luxembourg SICAV or SICAF) will be able to claim the benefits under articles 10 (dividends) and 11 (interest) in order to benefit from the reduced withholding tax ("WHT") rates on dividends and the exemption of WHT on interest, but only up to the portion of the units/shares held in the CIV by "good" or "qualifying" investors. "Good investors" are defined as investors resident in a country which has concluded a convention on administrative assistance in order to fight against tax fraud and tax evasion with the country in which the CIV invests. The DTT gives no indication as to the practical application of these conditions (how to calculate the portion of good investors? at what moment? etc.). Therefore, this provision seems very difficult to apply in the day to day practice of CIVs, especially for those held widely and/or for open-ended CIVs.

Permanent Establishment

The permanent establishment definition set forth in the DTT is now fully based on the BEPS definition. In this respect, the definition generally corresponds to the position taken by France and not to the one that Luxembourg defended, notably in relation to the MLI.

As a result, (1) the qualification of "dependent agent" is extended, (2) the scope of the preparatory and auxiliary activities exemption is based on a lighter BEPS option, (3) the anti-fragmentation rule which limits the preparatory and auxiliary exemption scope is introduced and, (4) anti-abusive splitting-up of contracts for construction site period computation purposes is also added.

Dividends

Under the DTT, dividends will be subject to a WHT of maximum:

  • 0% if the beneficial owner is a company which directly holds at least 5% (previously 25% under the current DTT, but 10% under the EU Parent Subsidiary Directive) of the capital of the paying entity for a period of 365 days, including the day of the dividend payment;
  • Domestic rate (currently 30% in France) if the dividend is paid out of tax exempt income or gains derived from immovable assets by an investment vehicle, established in a Contracting State, which distributes annually most of its income, if the beneficial owner of the dividend is resident in the other Contracting State and holds, directly or indirectly, a shareholding of 10% or more in the share capital of the investment vehicle;
  • 15% in all other cases (including in cases where the beneficial owner of the dividend paid by the real estate investment vehicle described above, holds a participation of less than 10% in this vehicle).

The aim of this provision is to make sure that dividend distributions by French OPPCI and SIIC are subject to a WHT of either 15% or 30%, depending on the shareholding held by the Luxembourg resident company. This change will incontestably impact real estate investments made by Luxembourg companies in France.

Interest and royalties

Interest will only be taxable in the country of the recipient, and thus cannot be subject to WHT in the source country. This was already the case under the old DTT and is currently not particularly relevant given that both countries do not levy WHT on interest under their internal law.

Royalties will be taxable in the country of the recipient could also be subject to a WHT of maximum 5% in the source country, which is correspondingly the rate applicable under the old DTT.

Capital gains & real estate rich companies

In principle, gains derived from the alienation of movable assets are taxable in the Contracting State of residence of the alienator.

The new DTT slightly amends the specific provision applicable since 2017 (based on the 2014 Protocol) to capital gains realised on the sale of real estate rich companies. The change introduced in the DTT relates to when the 50% threshold of real estate assets needs to be assessed. According to the amended provision, capital gains derived by a resident of a Contracting State from the alienation of shares and similar rights in a company, deriving directly or indirectly more than 50 % of its value from immovable property situated in the other Contracting State at any time during the 365 days preceding the alienation, may be taxed in that other State. As under the current provision, the rule applies to shares or other rights held both in a company resident in one of the Contracting States and in a company resident in a third country.

The DTT also introduces a rule according to which gains derived by an individual resident in one of the Contracting States from the alienation of a substantial shareholding (i.e. a direct or indirect shareholding giving rights to at least 25% of the profits of the company) in the share capital of a company resident in the other Contracting State are taxable in this Contracting State and not in the residence State of the alienator if the individual was resident of the other Contracting State at any time during the 5 years preceding the alienation of the shareholding. It appears to us that the compliance of this rule with some European fundamental rights could be challenged.

Employment income

As far as employment income is concerned, even though the rule has been redrafted to follow the OECD Model Tax Convention wording, the rule remains that the income derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State, unless the employment is "effectively" exercised in the other Contracting State. In other words, a French tax resident employed by a Luxembourg employer is taxed in Luxembourg on his or her employment income, but only to the extent that the work is effectively performed in Luxembourg.

Here, it is worth mentioning that the situation of cross-border workers will be slightly amended due to the fact that the Residence State of the employee will not be able to challenge the taxation of the salary in the State of the employer as long as the number of days spent by the employee outside of the employment State does not exceed 29 days per year. While this may appear to be good news at first sight for French cross-border workers, it seems that in certain cases the practice of the French tax authorities has been even more flexible: in 2012, while responding to a parliamentary question, the French Minister of Economy mentioned that a French employee of a Luxembourg company would remain taxable in Luxembourg on his or her salary to the extent that the employee did not spend more than one day per week (i.e. approximately 50 days per year) working in France.

Pensions

As far as pensions are concerned, pensions paid out of a compulsory social security system will generally be taxed in the source country.

Methods to avoid double taxation

France generally applies the credit method, with certain limits, to avoid double taxation. The benefit of a tax credit corresponding to the French tax for a French resident is subject to an effective taxation in Luxembourg. Luxembourg generally applies the exemption method. However, the credit method applies to dividends, royalties and income of artists and sportsmen.

Entry into force

The new DTT will enter into force as soon as France and Luxembourg have exchanged the instruments of ratification, following the ratification in their respective country. The new DTT will apply to taxes in relation to the calendar year, which will follow the entry into force of the DTT, i.e. to taxes in relation to the tax year 2019 at the earliest.

Implications

The DTT introduces significant changes, especially for real estate investment in France. Luxembourg taxpayers with investments in France or that plan to invest in France should seek advice from their tax adviser in order to analyse the potential impact of the new provisions on their investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions