Luxembourg: ATOZ Tax Alert - Luxembourg And France Launch The Ratification Procedure Of Their New Tax Treaty – Will The New Treaty Become Applicable As From 2019?

Last Updated: 3 December 2018
Article by Atoz Tax Advisers

Luxembourg and France have started the ratification process of the new double tax treaty ("DTT") they signed on 20 March 2018. For the new DTT to become applicable as from 2019, the two ratification procedures would need to be finalised and the instruments of ratification exchanged before the end of 2018. What are the chances of this happening in such a short time frame?

On 24 October 2018, France launched the ratification process of the new Luxembourg-France DTT. The French Parliament is expected to vote on the ratification law in December of this year, meaning that from a French perspective, an implementation of the new DTT as from 2019 could be achieved.

As far as the ratification by Luxembourg is concerned, today, the interim1 Luxembourg Government adopted the text of the draft law ratifying the DTT. It is true that many steps would need to be taken2 within a very short time frame in order for the new DTT to be applicable as from 2019 and that the Luxembourg future government will also have other pieces of legislation on its agenda which are high priority (such as the implementation of the Anti-Tax Avoidance Directive) in a context where a new government is yet to be officially formed following the 2018 October elections. However, one should bear in mind that ratification procedures can be finalised very quickly since their very purpose is only to approve a text (the DTT in this case) which is already final as it has already been heavily negotiated by the relevant governments prior to being approved, and therefore not subject to any amendments, unlike other pieces of legislation.

Therefore, even though the date as from which the new DTT will become applicable still remains uncertain at this stage, the chances that the new DTT will be applicable as from 2019 are rather high.

The aim of the new DTT is to replace the existing treaty that was signed in 1958, and amended 4 times in subsequent years. The DTT follows the structure and, for the most part, the content of the 2017 OECD Model Tax Convention.

Given the significant changes introduced, especially for real estate investments in France, Luxembourg taxpayers with investments in France or that plan to invest in France should seek advice from their tax adviser as soon as possible in order to analyse the potential impact of the new provisions on their investments.

You will find below an overview of the new DTT and its main provisions.

New Preamble and Principle Purposes Test

In line with the latest version of the OECD Model Tax Convention and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"), the following preamble has been included in the DTT: the aim of the DTT is the elimination of double taxation with respect to taxes on income and on capital while guarding against situations of non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements).

In addition, in order to address some forms of treaty abuse, the DTT contains a principal purposes test ("PPT") in accordance with Actions 6 and 15 of the Base Erosion and Profit Shifting ("BEPS") Action Plan, and in line with the guiding principle of paragraph 9.5 of the Commentary included in 2017 OECD Model Tax Convention. Under this PPT, a DTT benefit will be denied if it is reasonable to conclude that obtaining that tax benefit was one of the principal purposes of any arrangement or transaction (subjective test). However, DTT benefits will still be granted if it can be demonstrated that granting such benefits, in the circumstances at hand, would remain in accordance with the object and purpose of the relevant provisions of the DTT (objective test). Given the complexity in interpreting and applying this provision which will have to be read in conjunction with EU law (as defined at several occasions by the Court of Justice of the EU), it is recommended to seek advice from a tax adviser when setting up cross-border investments.

Persons Covered and Tax Residence

As far as persons covered are concerned, tax transparent entities (partnerships) are excluded from the qualification of person for DTT purposes. Nevertheless, the DTT could be applied to either France or Luxembourg source income derived through a transparent entity located in Luxembourg or in a third State having concluded with the source State a convention on administrative assistance, subject to the condition that the tax transparent treatment of the partnership is also recognised by the third State. French partnerships subject to tax in France are excluded from this provision and are treated as tax residents of France for the purpose of the DTT.

As far as tax residence is concerned, the DTT amends the existing rules applicable in cases of conflict of company residence and provides that a company is considered as resident in the State in which its effective place of management is located.

Application of some DTT provisions to Collective Investment Vehicles ("CIVs")

Contrary to the current version of the tax treaty, the DTT expressly states (in its Protocol) that it will apply to CIVs under certain conditions. This approach is notably compliant with the OECD report "The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles". The Protocol to the DTT provides that a CIV established in a Contracting State, to the extent it is assimilated to a CIV under the legislation of the other Contracting State, may be granted some of the DTT benefits under certain conditions. The CIV (e.g. a Luxembourg SICAV or SICAF) will be able to claim the benefits under articles 10 (dividends) and 11 (interest) in order to benefit from the reduced withholding tax ("WHT") rates on dividends and the exemption of WHT on interest, but only up to the portion of the units/shares held in the CIV by "good" or "qualifying" investors. "Good investors" are defined as investors resident in a country which has concluded a convention on administrative assistance in order to fight against tax fraud and tax evasion with the country in which the CIV invests.

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