Major impact of the revision of the France-Luxembourg tax treaty on the real estate industry

The new tax treaty between France and Luxembourg is now signed. Here are its main features of relevance for real estate professionals.

As expected, the new treaty draws on both the 2017 OECD Multilateral Instrument and the 2017 OECD model, in particular regarding the permanent establishment definition.

Concerning real estate investments, the revision of the tax treaty does not change the main features of the tax regime applicable to real estate gains. It however makes clear that the rule which allows the source State to tax capital gains on shares (where the value of these shares is derived for more than 50% from immovable property) applies if the 50% threshold has been crossed during the 365 days preceding the alienation.

By contrast, the new treaty should have a significant impact on dividends distributed by French REITs. Up to today the withholding tax levied on the dividend distributed by a French OPCI amounts to 5% if the beneficiary of the distribution holds 25% or more in the OPCI.

Following the revision of the France-Luxembourg tax treaty, distributions derived from real estate investment vehicles (such as OPCIs) will be taxed depending on the percentage of the holding by the investors as follows:

• If the beneficial owner holds less than 10% in a French REIT, a 15% withholding tax will be levied;
• If the beneficial owner holds at least 10% in a French REIT, a withholding tax will be levied at the domestic rate; this domestic rate is 30% if the recipient is a Luxembourg corporation subject to tax and it is reduced to 15% in case the recipient is a Luxembourg REIT equivalent to a French REIT.

This material increase of the withholding tax calls for a close scrutiny of the impact of the treaty with a view to adapting current structures to this new tax environment. We will be happy to discuss with you the solution tailored to your needs and constraints.