These changes relate, in particular, to the following topics:
- Definition of tax residency (Article 4)
- Taxation of dividends (Article 10)
- Taxation of capital gains (Article 13)
- Elimination of double taxation (Article 22)
- Anti-abuse provisions (Preamble and Articles 4 and 28)
Definition of tax residency
The New Treaty provides for the standard OECD definition of tax residency, according to which a tax resident is a person who, under the laws of a contracting State, is liable to taxes in such contracting State by reason of his/her domicile, his/her residence or its place of management or business.
Where a person other than an individual would qualify as a resident of both contracting States under the treaty definition, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Protocol to the New Treaty also includes a specific provision under which undertakings for collective investment (UCI) of Luxembourg that are assimilated under French law to French UCI can benefit from the New Treaty provisions relating to dividends and interest for such portion of French source dividends and interest they receive that corresponds to rights held by residents of France, Luxembourg or of a State having entered into an administrative assistance convention with France.
As compared to the Current Treaty, the New Treaty contains an extended definition of dividends which includes any income subject to dividend taxation under the laws of the contracting State where the distributing company is resident (e.g., in France, this should include liquidation proceeds and deemed dividends).
Article 10 provides for a 15% withholding tax on dividends when paid to a beneficial owner that is a resident of the other contracting State. This withholding tax is, however, eliminated if the beneficial owner is a company that is a resident of the other contracting State and that holds directly at least 5% of the share capital of the company paying the dividends throughout a 365-day period that includes the day of the payment of the dividends.
Specific provisions (Art. 10-6) apply to dividends paid from certain real estate investment vehicles (namely, as far as France is concerned, OPCIs – organismes de placement collectif en immobilier - and SIICs – sociétés d’investissement immobilier cotées). Such dividends are subject to a withholding tax in France:
- at the rate of 15% if the beneficial owner holds, directly or indirectly, less than 10% of the investment vehicle’s share capital; or
- at the domestic rate (currently 30%) if the beneficial owner holds, directly or indirectly, 10% or more of the investment vehicle’s share capital.
In line with the Current Treaty, gains derived by a resident of a contracting State from the alienation of immovable property situated in the other contracting State may be taxed in the State where such immovable property is located.
As far as gains deriving from the alienation of shares in French real estate companies are concerned, the New Treaty provides that gains derived by a Luxembourg resident from the alienation of shares or comparable interests may be taxed in France if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in France.
The New Treaty also provides that gains realized by individuals from the alienation of shares representing at least 25% of the rights in the benefits of a company resident of the other contracting State are taxable in this other contracting State. This provision only applies when the seller has been a resident of the other contracting State within a 5-year period prior to the disposal.
Elimination of double taxation
The mechanics chosen to eliminate double taxation have been modified. Especially, as far as dividends and royalties are concerned, Luxembourg will apply the credit method, i.e., dividends or royalties received from France will remain taxable in Luxembourg, but with a credit equal to the withholding tax levied in France, capped to the Luxembourg tax due on these dividends or royalties.
The New Treaty includes several anti-abuse provisions.
First, the New Treaty includes a Preamble, consistent with the provisions of the OECD multilateral instrument, which provides that the purpose of the New Treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
The New Treaty also includes (Art. 28) the “principal purpose test” provided for by the OECD multilateral instrument. This general anti-abuse rule provides that the benefit of the New Treaty will not be available if it is reasonable to conclude, having regard to all relevant facts and circumstances, that a main purpose for entering into certain transactions or arrangements was to benefit from the favorable provisions of the New Treaty, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the New Treaty.
Article 4 of the New Treaty also excludes from the definition of resident for New Treaty purposes a recipient of an item of income who meets the conditions to qualify as a resident under the New Treaty where (1) the recipient is only the apparent owner – bénéficiaire apparent – of said income and (2) the income directly or indirectly benefits to a person which is not a resident within the meaning of the New Treaty.
Entry into force
Both France and Luxembourg have to ratify the New Treaty and then notify the other party of this ratification. This process is expected to take a few months.
The New Treaty will enter into force on the date of receipt of the second notification (the “Date of Entry into Force”). Its provisions will start applying as follows:
- with respect to income taxes collected by way of withholding tax: to income taxable after the calendar year during which the Date of Entry into Force took place (i.e., as from 1 January 2019 at the earliest);
- with respect to income taxes that are not collected by way of withholding tax: to income relating to, as the case may be, any calendar year or any financial year starting after the calendar year during which the Date of Entry into Force took place (i.e., starting on 1 January 2019 at the earliest);
- with respect to other taxes: to taxes which triggering event will occur after the calendar year during which the Date of Entry into Force took place (i.e., as from 1 January 2019 at the earliest).
The above highlights are only a general summary of the New Treaty provisions. A detailed review of the New Treaty will need to be made on a case-by-case basis in order to assess its impact on both existing investment structures involving France and Luxembourg and structures that may be used for future investments.