The double tax treaty between France and Luxembourg is about to be modified by an amendment which will change within the next months the conditions of taxation for Luxembourg companies holding real estate situated in France. Luxembourg and France have entered into a side-letter “avenant” to the double tax treaty (the “Treaty”) which will enter into force once each country has gone through its approval process and notified the other country that the process has been completed. Furthermore the new regime will apply to income in relation to the calendar year following the entry into force of the Treaty, which means that the Treaty will apply at the earliest as of 1 January 2007 to the extent France and Luxembourg approve the side-letter before the end of the year 2006.
Actually, under the current Treaty, when a Luxembourg company holds a real estate property in France and does not exploit itself, both the Luxembourg and French authorities do not tax the income derived from this real estate property (i.e. rental income and capital gain (upon sale of the property)).
The reasoning behind this is that Luxembourg tax authorities consider the income or the capital gain arising from French immovable property as being taxable only in France as the real estate is located in France. However, French tax authorities, based on their national tax law consider real estate income to be business profits which should be taxed in Luxembourg except when the Luxembourg company has a permanent establishment in France.
The purpose of the amendment of the Treaty is to close the above loopholes that exist in the current Treaty. Taking into account the various consequences and the number of companies aimed by this modification, our law firm has studied a number of alternatives in order to reply to investors’ questions, guide them among the choices suggested by this amendment and advice them in the various opportunities offered in the future.
A number of alternatives that we studied are the following:
For existing structures: by external or intra-group refinancing structures or by the contribution of the real estate property to a newly created Luxembourg company .
For future acquisitions: by the use of the participation exemption based upon the EC mother subsidiary directive.
Do not hesitate to contact us for any further details and advices.