Tax treaty news

France

On 20 March 2018, a new double tax treaty together with an associated protocol (“New DTT”) were signed by the French and Luxembourg governments. It is expected that the New DTT, implementing the OECD/G20 BEPS new approaches, will replace the current double tax treaty dated 1 April 1958 (“Current DTT”). It will enter into force after the completion of the ratification process by each State, which may be as early as January 2019.

The most important changes can be summarised as follows:

• Anti-abuse rules: A new general anti-avoidance rule based on the Principal Purpose Test is included to deny treaty benefit if such benefit is one of the main purposes of a given arrangement or transaction. The New DTT also contains an uncommon clause allowing France to apply its domestic anti-abuse provisions to situations covered by the New DTT.
• Permanent establishment: The New DTT contains a wider definition of permanent establishment in line with BEPS under the new rules. Situations where contracts are substantially negotiated in France by a dependent agent and are merely authorised in Luxembourg may give rise to a permanent establishment in France.
• Withholding taxes on dividend distribution made by French Organismes de Placement Collectif Immobilier ("OPCIs"): A major point of attention regarding the New DTT is the withholding tax rate applicable to distributions made by a French OPCI. Luxembourg investors owning more than 10% in French exempt real estate vehicles will be subject to the French withholding tax of 30% (as opposed to the previous rate of 5% under the Current DTT). However, according to §2 of the Protocol, a reduced treaty rate of 15% may, under certain conditions, apply to distributions made to Luxembourg investment funds considered as similar to French investment funds.
• Withholding taxes on other passive income:
  1. Dividends (other than distributed by a French OPCI): the treaty provides for a standard withholding tax rate of 15% which can be reduced to 0% if the beneficial owner is a company owning directly at least 5% of the capital of the company paying the dividends for a 365-day period including the day of the payment.
  2. Interest: 0%.
  3. Royalties: 5%. 
• Employees: Employees residing in France but working for a Luxembourg employer will be subject to tax in Luxembourg on their whole wages provided that they performed their functions in another State (France or a third State) for a period not exceeding 29 days in total per year.
• Elimination of double taxation: France applies the credit method for the avoidance of double taxation, while Luxembourg applies the credit method (with respect to dividends, royalties and directors’ fees) and the exemption-with-progression method for other income. It is no longer possible, under the New DTT, for a French distributing company which is neither listed in the parent subsidiary directive nor fully taxable to benefit from the participation exemption. Distributions made by OPCIs should thus be fully subject to tax in Luxembourg.

Senegal

On 15 February 2018, Senegal ratified the double tax treaty on income and capital signed between Luxembourg and Senegal on 10 February 2016. The treaty will be in force after the completion of the notification process by each State.

The following withholding tax rates will apply under the new treaty:

• Dividends: the treaty provides for a standard withholding tax rate of 15% which can be reduced to 5% if the beneficial owner is a company (other than a partnership) owning directly at least 20% of the capital of the company paying the dividends.
• Interest: the treaty provides for a withholding tax rate of 10%, except for interest paid to the other state, one of its local bodies or the central banks.
• Royalties: the treaty provides for a withholding tax rate of 10% which can be reduced to 6% for the use of, or the right to use, industrial, commercial or scientific equipment. 

Both States apply the exemption and credit methods for the avoidance of double taxation.

Oman

Based on recent public information, Luxembourg and Oman have expressed their intention to swiftly sign the already initialled double tax treaty.