Does the change in the French-Luxembourg Tax Treaty bring an end to tax efficient real estate structuring in France?

The answer is NO.

Actual situation

The actual French-Luxembourg tax treaty is an old treaty which contains a favourable capital gain taxation article. As a result most French real estate acquisitions are structured in the way whereby the French real estate is acquired by a French company which is owned by a Luxembourg holding company. The disposal of the French real estate entity by the Luxembourg holding company is exempt from French and Luxembourg capital gain tax.

Amendment of the French-Luxembourg Tax Treaty

The French and Luxembourg governments have signed a new amendment to the tax treaty that will significantly impact the investment structures involving Luxembourg vehicles holding French and real estate assets. The new provisions will apply at the earliest as from 1 January 2016.

The amendment adds a new paragraph 4 to Article 3 of the treaty. This will lead to the taxation in France of capital gains derived by a Luxembourg company upon the sale of shares in an entity (being located in France, Luxembourg or in any other jurisdiction) of which the assets are predominantly composed of immovable properties located in France or derive directly or indirectly more than 50% of their value from such properties. As a result the capital gain will be taxable in France at the corporate income tax rate of 33.33%.

It is anticipated that a lot of French real estate structures will be amended during 2015. Indeed, during the course of 2015 it is still possible to restructure without incurring capital gain taxation on the transfer of the shares of the French real estate company.

Various solutions are available depending on the size of the real estate investment and the residence of the ultimate real estate investor. One of the solutions is to make use of a Dutch sandwich structuring investing in a French real estate company. By using such a structure, the capital gain can be realised free of Dutch and French capital gain tax. Belgium can also provide a solution.

Existing structures:

For existing Luxembourg-French real estate structures, a restructuring can still be organised in the course of 2015 to the extent economical reasons are present. Some examples are as follows:

  • Contribution of the shares of the French real estate company into the Dutch (or Belgian) structure followed by a liquidation of the Luxembourg company*
  • Transfer of the management and control of the Luxembourg company to the Netherlands followed by the interposition of a Dutch holding between the ultimate shareholder and the transferred Luxembourg company.

* To avoid Dutch (Belgian) withholding tax on up-stream dividend distributions to the ultimate owners, the Luxembourg company can remain in place. By using, for instance, alphabet shares, Luxembourg withholding tax is not due.

New structures:

New French real estate investments can be structured by making use of the Dutch sandwich structure (or Belgian holding) eventually owned by an ultimate Luxembourg holding company to avoid Dutch (Belgian) withholding tax on up-stream dividend distributions to the ultimate beneficial owners.