On 2 July 2019, the Luxembourg Parliament ratified the new Double Tax Convention with France. A request to dispense with the second vote has been filed.
On 20 March 2018, Luxembourg and France signed a new double tax convention, which replaces the current convention signed in 1958. The new double tax convention is in line with the new international tax standards.
On 14 February 2019, the new Double Tax Convention was ratified by France.
With the ratification by Luxembourg, the provisions of the new Double Tax Convention should therefore apply as from 1 January 2020 provided both France and Luxembourg have exchanged their instrument of ratification by 31 December 2019.
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.
Contrary to the provisions of the double tax treaties with Belgium or Germany, French-resident individuals will not be exempt in France on their Luxembourg salaried income, but subject to tax there with a tax credit.
The new Double Tax Convention provides for a full 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.
Dividends from shareholdings of at least 25 percent in French companies will no longer be tax-exempt in Luxembourg under the treaty, but they will benefit from a tax credit. That means that, in the future, dividends from shareholdings in French companies may only be exempt in Luxembourg if the right conditions are met for the Luxembourg domestic participation exemption regime.
Undertakings for Collective Investment (‘UCI’)
According to the Protocol, French and Luxembourg UCIs may benefit from the reduced WHT on dividends and interest (although they would not be treated as residents under the new convention), to the extent that (i) the 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.
Real estate investments
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 more than 10% directly or indirectly, then the French domestic WHT would apply (currently 30%).
Those Luxembourg resident shareholders that do own more than 10 percent of the OPCI’s share capital may still benefit from a 15 percent French WHT rate, but only if they are made to Luxembourg UCIs that are comparable to French UCIs (based on French domestic law).
The new Double Tax Convention includes recommendations of BEPS Action 7 on Permanent Establishment (‘PE’). In particular, the definition of PE is extended to commissionaire arrangements to include situations in which the dependent agent “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”.
Please refer to our tax alert for more details on the provisions of the new Double Tax Convention.
The bill ratified yesterday includes not only the new Double Tax Convention with France but also the Double Tax Convention with Kosovo, the Amendment and Protocol to the Double Tax Convention with Belgium, and the Protocol to the Double Tax Convention with Uzbekistan.
This ratification is a new milestone in Luxembourg’s strategy to expand its Double Tax Convention network and adapt it to the new tax landscape led by the BEPS initiative.
Most of the new provisions above-listed will require further practical clarifications from the French and Luxembourg authorities.
Please stay tuned for further details in this respect.