New Tax Treaty between FRANCE and LUXEMBOURG: French Tax implications for investors, March 2018

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INTRODUCTION

France and Luxembourg signed a new double tax treaty on income and capital (the “New D.T.T.”) on March 20, 2018. The New D.T.T. is awaiting ratification by the parliaments of both countries, which is expected to occur this year. If the target date for ratification is met, some provisions will enter into force as of January 1, 2019. The New D.T.T. comes 60 years after the passage of the current double tax treaty on income and capital (the “Current D.T.T.”), which was signed on April 1, 1958, and has been amended four times since it entered into force, in 1970, 2006, 2009, and 2014. One significant change resulting from the New D.T.T. is the increase in the withholding tax rate on distributions made by certain French real estate investment vehicles from 5% to a potential 30%. These structures are currently heavily used by institutional real estate investors. It is likely that the real estate industry will be busy this year, searching for ways to cope with the increased tax burden. Many of the provisions of the New D.T.T. are modeled after the O.E.C.D. Model Tax Convention (the “O.E.C.D. Model”). However, due to the trade history between France and Luxembourg, there are notable departures. Interestingly, several provisions of the New D.T.T. are directly inspired by the Multilateral Instrument (“M.L.I.”), even though Luxembourg reserves the right to exclude some of these provisions in its Covered Tax Agreements, which include double tax treaties already in force and therefore encompass povisions that are now part of the New D.T.T.

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