02-08-06
Real Estate provisions of France-Luxembourg Double Tax Treaty amended
Luxembourg and France have initialed a side-letter amending the real estate income provisions of the double tax treaty concluded on April 1st, 1958.
As the Luxembourg tax authorities reported today, Luxembourg and France initialed in July a side-letter amending the Double Tax Treaty (the “Treaty”) they concluded on April 1st, 1958.
Purpose
The aim of the amendment of the Treaty is to enable the taxation of profits, income and gains arising from the running and sale of immovable property in the State in which the immovable property is located (amendment to Article 3 of the Treaty). This will apply whether the immovable property is owned by an individual, a Company or a look through entity and whether or not the immovable property is to be allocated to a permanent establishment. In other words the qualification of the income as real estate income will prevail over the provisions dealing with the taxation of business income connected to a permanent establishment (amendment to Article 4 of the Treaty).
The side-letter introduces also an identical provision in respect of professional income, according to which the qualification of the income as real estate income within the meaning of article 4 will prevail over a qualification as professional income within the meaning of Article 15 of the Treaty.
Objectives and implications
The objective of the amendments to the Treaty is to avoid situations, such as in the La Coasta case (12831/14442c), where income from immovable property was qualified differently by the Contracting States involved (real estate income versus business income), so that the income was finally considered as taxable in neither of the States: Luxembourg considered that income realized by a Luxembourg Company and arising from a French immovable property was to be regarded as taxable in France according to Article 3 of the Treaty whereas France considered that such income was business income taxable in France only to the extent it is connected to a French permanent establishment (“PE”) of the Luxembourg Company (Article 4 of the Treaty). In absence of such PE, France considered that the income was not taxable in France and at the end, the income was neither taxed in France nor in Luxembourg.
The side-letter does not entail any provision according to which capital gains realized upon the sale of shares of a company the assets of which mainly consist in real estate assets will be considered as real estate income (i.e. will not be considered as income from movable property). Structures involving a Luxembourg fully taxable company investing in French immovable property via a French real estate company should therefore not be affected by the present amendments to the Treaty: the income realized upon the sale of the shares in the French real estate company should remain a capital gain which should be only taxable in Luxembourg.
Entry into force
The side-letter 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 Treaty will apply to income in relation to the calendar year (or any tax year starting after January 1st) following the entry into force of the Treaty, which means that the Treaty will apply at the earliest as from January 1st 2008 to the extent France and Luxembourg approve the side-letter before the end of the year 2007.
Unofficial translation into English of the amendments to the Treaty as introduced by the side-letter
- New wording of Article 3 of the Treaty:
§1. Income from immovable property and property accessory thereto, including profits from agricultural and forestry undertakings, may be taxed only in the State in which the property is situated.
This provision shall also apply to profits derived from the alienation of such property.
§2. The provisions of paragraph 1also apply to income arising from the running ("exploitation") and sale of real estate assets of an enterprise.
§3. The provisions of paragraphs 1 and 2 also apply to the gains arising from the running and sale of immovable property realized through entities which, whatever their legal form, have no own personality (distinct from the one of their members) for the purpose of the application of the taxes mentioned in Article 1.
- Article 4 of the Treaty is completed as follows
§5. When profits entail income types which are dealt with in other articles of the Treaty, the provisions of these articles are no affected by the provision of the present article.
- Article 15 of the Treaty is completed as follows
§5. When profits entail income types which are dealt with in other articles of the Treaty, the provisions of these articles are no affected by the provision of the present article.
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