On 20 March 2018, Luxembourg and France have signed a new double tax treaty, which replaces the current tax treaty of 1958 and includes the new international tax standards.
The text has not been published yet. It can, however, be reported that the text is based on the latest OECD model tax convention that takes into consideration the OECD-BEPS recommendations on treaty abuses.
This tax alert highlights some of its important tax provisions.
The new text includes provisions that will, according to the Luxembourg government, benefit more than 95,000 French-resident individuals working in Luxembourg. Luxembourg will keep its full taxation rights on the salaried income in cases where a French-resident individual working for a Luxembourg employer exercises his/her functions in another State (France or a third State) for a period not exceeding 29 days in total per year. In addition, the treaty specifies that the right to tax statutory pensions (1st pillar) remains with the source State.
The new text now provides for an exemption from withholding tax (‘WHT’) on dividends, in cases where the recipient is a company and has held a minimum 5% interest in the capital of the company paying the dividends over a period of 365 days. The current tax convention does not provide for a full WHT exemption, but rather for the possibility to reduce the WHT to 5% when the recipient is a company that holds at least 25% of the capital of the paying company.
It is also expected that dividends will no longer be tax-exempt in Luxembourg under the treaty but will benefit from a tax credit.
It is expected that undertakings for collective investment (UCIs) established in Luxembourg or in France may benefit from the provisions on the reduction of WHT on dividends and interest, to the extent that (i) this UCI can be assimilated to a UCI of the other contracting State, and (ii) the beneficiaries of the UCI are residents of one of the contracting States or of a State that has concluded an administrative assistance convention to combat tax fraud and tax evasion with the source State.
It is expected that French SPPICAVs or French SIICs owned by Luxembourg companies are subject to a 15% WHT (as opposed to the current 5% under certain conditions) if the Luxembourg resident shareholder owns, directly or indirectly, less than 10% of the SPPICAV share capital. If the Luxembourg company owns, directly or indirectly, 10% or more of the SPPICAV share capital, the French domestic WHT would apply (currently 30%).
The treaty, which is in line with the new OECD model tax convention and therefore the anti-treaty abuse provisions of the OECD-BEPS recommendations, shows again the commitment of Luxembourg to comply with the new international tax standards.
Taxpayers with cross-border operations in Luxembourg and in France will need to assess the potential impact of the treaty on their operations.
It must also be kept in mind that the treaty now needs to be ratified by both countries for it to enter into force.
Stay tuned for more details when the text of the treaty is released.
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