Long anticipated, the Franco-Danish Tax Treaty was finally terminated on June 10, 2008 and will be effective on January 1, 2009.
As from this date, transactions between Denmark and France will be subject to taxes imposed respectively under Danish and French domestic law, and therefore potentially exposed to double taxation.
Apart from Danish taxation applicable to Danish source retirement pensions received by individuals moving to France for their retirement, this will, among other things, involve the following significant changes as from January 1, 2009:
Termination of the tax exempt status of immovable property situated in France:
Until now, the taxation of income derived from real estate assets situated in France varied, depending on whether the beneficiary was a Danish resident, individual or company.
Whereas Danish individuals were taxable in France, Danish companies were not subject to any taxation, whether in France or in Denmark on their income derived from real assets situated in France (unless such immovable property was held through a French permanent establishment held by a Danish company).
As from January 1, 2009, income derived from real estate assets situated in France by Danish residents will be subject to taxation in France under the standard rules applicable to non-French residents as follows:
- Progressive rate (up to 40%) if the beneficiary is a Danish individual; and
- A 33.1/3% rate if the beneficiary is a Danish company.
- If the beneficiary is a Danish professional real estate broker / dealer (whether an individual or a company), French taxation will apply at the rate of 50%.
In addition, although capital gain derived by a Danish company from the sale of French real estate assets or shares in a real estate company is exempt from any taxation under the current Franco- Danish Tax Treaty, capital gain recorded as from January 1, 2009 by any Danish resident will be taxable in France as follows:
- a 33.1/3% rate will apply to capital gains realized by Danish companies from the sale of real estate assets located in France or shares in unlisted French real estate companies. A reduced 16.5% rate will apply to capital gains realized from the sale of shares in listed French real estate companies;
- The current applicable 16% rate will still apply to capital gains realized by Danish individuals from the sale of real estate assets located in France or the sale of shares in unlisted French real estate companies1
Danish companies holding real estate situated in France or shares in a real estate company should therefore consider a sale of these assets before January 1, 2009 in order to avoid French capital gains tax.
French withholding tax applicable to payments made between France and Denmark.
The current Franco-Danish Tax Treaty eliminates any withholding tax on dividends, interest or royalties paid between France and Denmark.
As from January 1, 2009 and as long as no new tax treaty is in place between France and Denmark, withholding tax will be levied according to the provisions contained in French and Danish domestic tax law respectively.
Accordingly, in addition to any applicable taxation in Denmark, French source income received by a Danish tax resident will be subject to the following French withholding tax:
- Dividends paid by a French distributing company to a Danish resident will be subject to a French withholding tax at the rate of 25%, unless exempt under the parent-subsidiary dividends directive;
- Interest from French sources paid to a Danish resident will be subject to a withholding tax of 18%, unless exempt under the interest and royalties directive;
- Royalties paid by a French debtor to a Danish resident will be subject to a French withholding tax at the rate of 33.1/3%, unless exempt under the interest and royalties directive;
- Payments made by a French resident in consideration for services rendered by a Danish supplier should be subject to the 33.1/3% withholding tax provided by Article 182 B of the French Tax Code. However, Danish suppliers should be in position to invoke the EU principles in order to claim for reimbursement of such withholding tax.
The termination of the current Franco-Danish Tax Treaty implies significant changes which should be taken into consideration with a view to future transactions between France and Denmark.
1 Capital gains on listed real estate companies realized by Danish individuals are not subject to French taxation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.