New double tax treaty between France and Luxembourg: substantial impact on real estate investors

On 20 March 2018, the governments of France and Luxembourg signed a new double tax treaty (“New Treaty”) replacing the current treaty dated 1 April 1958 (“Old Treaty”). Although the New Treaty is based on the 2017 OECD Model Tax Convention, it contains certain substantial derogations therefrom.

Amongst others, the following provisions are noteworthy:

  • an exemption from withholding tax is available for dividends derived from qualifying participations of at least 5% held within a period of at least 365 days;
  • a reduced withholding tax rate of 15% is available for dividends originating from real estate and distributed by exempt distributive vehicles if the beneficial owner holds directly or indirectly a participation representing less than 10% of the share capital of the distributing fund. In case the beneficiary holds 10% or more of the share capital of the distributing fund, the dividends are subject to tax at the rate foreseen by the domestic tax laws of the source State, which in case of France may currently reach 30%;
  • undertakings for collective investments may benefit from the withholding tax exemption on the portion on the income corresponding to the entitlements of residents of either Contracting State or of a State with which the source State has concluded a treaty on administrative assistance for the purpose of preventing tax evasion and avoidance; and
  • a general anti-abuse provision as provided for by article 20 OECD MTC is included.