French tax issues

Publié le 9 septembre 2014 | par Nathalie Mourlot


Real estate capital gains : signature of the amendment to the tax treaty between France and Luxembourg

The French and Luxembourg Ministers of Finance have signed on 5 September 2014 the 4th amendment to the tax treaty between France and Luxembourg dated 1 April 1958. This amendment modifies the article of the tax treaty relating to the taxation of income from immovable property, i.e. provides that gains deriving from the alienation of shares in a predominantly real estate company shall only be taxed in the State where the immovable property is situated.

Photo P. Prince


   By Pascale Prince

   Partner at Denjean & Associés

For the purpose of this provision, a predominantly real estate company is defined as a company, trust, or any other organism or entity of which the assets are composed for more than 50% of their value or derive their value for more than 50%, whether directly or indirectly, from immovable properties located in a contracting state. Immovable properties allocated by such an entity for its own business use are not taken into consideration. Based on this new provision, the capital gains resulting from the sale by a Luxembourg entity of its shares in a French predominantly real estate company would be taxed in France.

In practice, a pre-payment of a third of the capital gain should be made at the time of the disposal through the intermediate of a tax representative. This pre-payment will be deducted from the corporate income tax liability of the fiscal year of the sale at the standard rate of 34.43%.

The amendment provides that (i) it will apply for the first time to gains taxable after the calendar year in which the amendment entered into force for those income taxes withheld at source (ii) regarding income taxes not withheld at source, first time application will be for gains relating to calendar years or fiscal years open after the calendar year during which the amendment entered into force.

Accordingly, the amendment will not have any retroactive effect. Since the entry into force will be subject to the ratification of the amendment by both France and Luxembourg, the time to complete such formalities will determine when the amendment will be applicable for the first time. If the process is completed by the end of 2014, capital gains realized as from 1 January 2015 would become taxable in France.



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