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New Tax Legislation - between France and Luxembourg
22/09/2014

On 5 September 2014, France and Luxembourg have signed an amendment (the fourth one since 1 April 1958) to the France-Luxembourg Double Tax Treaty (DTT), affecting the taxation of a capital gain operated indirectly, through an interposed Company, on real estate.

Now, the afore mentioned Amendment inserts a new 4th paragraph to the Article 3 of the DTT, which allocates the exclusive right to tax capital gains realized on the disposal of stock, shares, and other corporate rights in a “real estate entity” (société à la preponderance immobilière) to the Contracting State where the immovable property is located. This new Article 3.4 of the Treaty aims to remove the tax exemption which used to apply to Luxembourg companies selling shares in a French real estate company.

A ‘’real estate entity” (société à la preponderance immobilière) is any type of legal person or entity that:

1. Holds assets or property consisting of more than 50% of their value, or which derive more than 50% of their value…
2. Directly or indirectly through one or more interposed companies…
3. From immovable property situated in a Contracting State or rights deriving from such property…
4. Being clarified that property(ies) that is/are attributable to the own enterprise of such company(ies) is/are not considered by this rule.

Before this amendment, the sale of shares in French real estate companies (ex.: SCI, SAS)  by  Luxembourg ones was not subject to French Capital Gains Tax - CGT (and often neither to the Capital Gains Tax in Luxembourg).

The new amendment provides that when a company’s assets consist predominantly of real estate located in a country, then the sale of the shares of this company is subject to the tax law of the country where the immovable property is located. Therefore, France is allowed to levy CGT resulting from the sale of shares in French or Luxembourg companies that own predominantly real estate property in France.

Furthermore, the new amendment also allows France to levy the CGT on the sale of the shares of a Luxembourg Company, when more than 50% of the value of the Luxembourg shares derives indirectly, through the interposed French SCI, from French property.

An owner should also bear in mind that the amendment has not entered into force yet, however, it will in the month following completion of the ratification process and would apply to taxes levied or withheld the year after its entry into force. 

Rosemont Consulting is able to assist offering the following advice:

1. How to liquidate an existing structure while optimizing the Capital Gains Tax for the future;
2. Coordinate the impact and actions to be taken regarding the Wealth Tax aspects;
3. Analyze whether the existing company(ies) could be kept but restructuring its ownership in a way that permits to benefit of the free Capital Gains Tax for the future;
4. Analyze benefits of transferring shares of the existing French SCI to a Monegasque SCP (as it offers better tax treatment, especially regarding inheritance taxes).

Please do not hesitate to contact Cecile Acolas at c.acolas@rosemont.mc for queries on these topics.

For any enquiries on worldwide tax and inheritance planning, and French or Monaco tax residence planning, do not hesitate to contact us.

For further information on Rosemont Consulting SARL and services provided please visit www.rosemont.mc