Amendment to the France-Luxembourg tax treaty

On 5 September 2014, France and Luxembourg signed a Fourth Protocol to the Tax Treaty of 1 April 1958 (the “Treaty”). 

This protocol adds a new paragraph to Article 3 of the Treaty specific to the disposal of shares of companies said to be “mainly real estate”, on the basis of the OECD model. The protocol also provides that “Profits from the disposal of shares, units or other rights in a company, trust or any other institution or entity, whose assets or property are made up of more than 50 per cent of their value or hold more than 50 per cent of their value - directly or indirectly through one or more other companies, trusts, institutions or entities – of real estate situated in a Contracting State or of rights in such property shall be taxable only in that State.” 

Capital gains realised by a Luxembourg company on the sale of shares of a company holding, directly or indirectly, mainly real estate in France, including through chains of companies, will no longer be subject to tax in Luxembourg, where they could benefit under certain conditions from an exemption under the parent-subsidiary regime, but from now on will be taxable in France. 

By this clarification, the Treaty thus embraces the conventional practice of France. 

The protocol states specifically that this new provision does not contravene the application of Council Directive 2009/133/EC relating to cross-border mergers, or the transfer of the registered office of a European Company or a European Cooperative Company between Member States. This must therefore be taken into account in the event of a restructuring. 

The protocol will enter into force the calendar year following the ratification of the instruments, at the earliest on 1 January 2015. 

We will provide more details on the implications of this protocol in a later publication.