On September 5, 2014, French Minister of Finance Michel Sapin
and Luxembourgian Minister of Finance Pierre Gramegna signed an
amendment to the France–Luxembourg Tax Treaty (1958) (the
"Tax Treaty"), as amended by the 1970 exchange of letters
and by the 1970, 2006, and 2009 protocols.
The amendment, in line with the current OECD Model Tax
Convention on Income and Capital, reverts to the tax treatment of
capital gains arising on the direct and indirect disposal of real
estate assets and puts an end to the potential double-tax exemption
regularly applied until now regarding sale of real estate
Former Tax Treatment. The former tax treaty
permitted the avoidance of taxation on capital gains arising from
the disposal of real estate assets located in a related country
held through one or several interposed entities in the other
country. Indeed, such sale did not qualify as real estate income
with respect to the Tax Treaty and was therefore not taxable,
neither in France nor in Luxembourg.
For instance, where a Luxco sold the equity interest held in a
French real estate entity, no taxation was applied since the
capital gain arising on this sale was:
Tax exempt in Luxembourg, as the Luxembourg tax authorities
treated the sale as a sale of French real estate that was taxable
in France only pursuant to the former Article 3 of the Tax Treaty;
Also tax exempt in France, as the Tax Treaty did not provide
that an equity interest in a real estate partnership must be viewed
as a real estate investment, so the gains were not taxable in
France unless the selling Luxco had a permanent establishment in
Tax Treatment Resulting from the Amendment. The
amendment modifies this tax treatment and puts an end to the above
potential double-tax exemption. Indeed, the amendment provides a
new paragraph to Article 3 of the Tax Treaty (i.e., a
"Prépondérance immobilière" clause)
specifying the case of the sale of shares of a company, fiduciary,
or any other institution or entity whose assets consist for more
than 50 percent of their value—directly or indirectly through
one or several companies, fiduciaries, institutions, or other
entities—of real estate assets.
Under this new rule, capital gains arising on the sale of shares
of such entities would be taxable only in the country in which the
related real estate assets are located.
The amendment will enter into force on the first day of the
month following the reciprocal notification of its ratification in
Pursuant to Article 2.2 of the amendment, the new rule will
To capital gains taxable after the calendar year during which
it enters into force, for income taxes levied as a withholding
To capital gains occurring during tax years beginning after the
calendar year during which it enters into force, for income taxes
not levied as a withholding tax; and
To taxation whose action rendering the taxes assessable occurs
after the calendar year during which it enters into force, for
other income taxes.
Accordingly, where the amendment would be ratified by both
states before December 31, 2014, only capital gains realized as
from January 1, 2015, should fall under the scope of this new
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.
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The Cyprus Tax Department recently issued Forms T.D 38, T.D 38Qa and T.D 38Qb applicable to individuals being Cyprus tax residents but non-Cyprus domiciled.
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