France-Luxembourg tax treaty change cannot come into force until 2017
France and Luxembourg failed to ratify a protocol changing the France-Luxembourg double tax treaty by 30 November, which means that a change which will affect real estate structures cannot come into force until 1 January 2017, at the earliest, for companies whose fiscal year is based on a calendar year.
When the change is effective a Luxembourg company will be taxed in France on capital gains made on the sale of an entity whose assets predominantly comprise French real estate or derive directly or indirectly more than 50% of their value from French real estate. Until then, sales by Luxembourg entities of these same shares are not taxed in France at all, but exclusively in Luxembourg, where the resulting tax liability is usually quite low.
Franck Lagorce, an expert in French tax at Pinsent Masons, the law firm behind Out-law.com said: “Although the delay gives a bit more breathing space, investors in pure French real estate whose business structures include a Luxembourg platform will still need to consider how they will adapt to the new environment post 1 January 2017, both for their existing investments, but also for operations which are on the verge of being sold either during 2016 or at a later stage”.
“Some real estate investors will be considering whether non listed French REITS could continue to be the answer,” Lagorce said. “For others, who are both owners and operators of asset classes such as hotels, vineyards, or hospitality and healthcare projects for example, where the value of the goodwill in the business can exceed the French ‘bricks and mortar’ component, maybe the current business structure will also continue to prove and remain effective – at least until any further change is made to the treaty”.
Lagorce said that the treaty change would not cause problems for those who are not investors in French real estate. “Despite the significant change this amendment will bring for real estate players, Luxembourg is likely to keep its dominant role as a gateway into Europe – and into France in particular,” he said.
“German real estate investors are key players on the French market, and there is a more recent trend of French real estate investors taking a closer look at Germany so similar changes to the France/ Germany treaty will also be a concern,” he said.
A protocol amending the France-Germany double tax treaty was signed on 31 March. When this comes into force, one of the changes it will have is that when a resident of one state sells shares in a company that owns real estate located in the other state, any gains made on the shares will be also taxable in the state where the real estate is located and not only in the state where the seller is resident. If both states are able to ratify the changes to the treaty and notify these by 30 December 2015, the changes will affect distributions paid-out on or after 1 January 2016 and capital gains realised during financial years begun on or after 1 January 2016.
Franck Lagorce said: “As far as we are aware, this change has not yet been ratified by either state, but it could conceivably happen over the next few weeks. We therefore don’t yet know whether there will be a breathing space for France/ Germany cross-border investments”.
