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Luxembourg: Income tax treaty with France

Luxembourg: Income tax treaty with France

Luxembourg’s Parliament on 2 July 2019 ratified a new income tax treaty with France.

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The new treaty was signed in March 2018, and would replace the existing income tax treaty (signed in 1958) between Luxembourg and France.

France ratified the treaty in February 2019. Accordingly, with ratification by Luxembourg, the provisions of the new income tax treaty would be expected to apply as from 1 January 2020 (assuming France and Luxembourg exchanged their instruments of ratification by 31 December 2019).

The new income tax treaty includes measures specifically addressing:

  • French commuters—Luxembourg retains its full taxation rights on the salaried income in instances when a French-resident individual working for a Luxembourg employer exercises his/her functions in another country (France or a third state) for a period not exceeding 29 days in total per year. Unlike the provisions of Luxembourg’s income tax treaties with Belgium or Germany, French-resident individuals will not be exempt in France on their Luxembourg salaried income, but subject to tax in Luxembourg but with a tax credit.
  • Withholding tax on dividends—A full exemption is available in instances when 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% in French companies will no longer be tax-exempt in Luxembourg, but may benefit from a tax credit. Accordingly, dividends from shareholdings in French companies would only be exempt in Luxembourg if certain conditions are met for the Luxembourg domestic participation exemption regime.
  • Undertakings for collective investment (UCI)—French and Luxembourg UCIs may benefit from the reduced withholding tax rate on dividends and interest if certain conditions are met.
  • Real estate investments—French SPPICAVs or French SIICs owned by Luxembourg companies are subject to a 15% rate of withholding tax (instead of the current rate of 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 withholding tax would apply (currently at a rate of 30%). Luxembourg resident shareholders that own more than 10% of the OPCI’s share capital may still benefit from a 15% rate of French withholding tax, but only if the Luxembourg UCIs are comparable to French UCIs (based on French domestic law).
  • Permanent establishments—the recommendations under the OECD’s base erosion and profit shifting (BEPS) Action 7 on permanent establishments (PEs) are reflected, and in particular, the definition of a PE is extended to commissionaire arrangements to include situations when the dependent agent “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.”


Read a July 2019 report prepared by the KPMG member firm in Luxembourg

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