On 20 March, 2018, France and Luxembourg signed a new Double Tax Treaty (DTT), which was released yesterday. The aim of the new DTT is to replace the existing one that was signed in 1958, and amended 4 times since then. The DTT follows the structure and, for the most part, the content of the 2017 OECD Model Tax Convention. ATOZ, Taxand Luxembourg, presents an analysis of the main provisions of the DTT, which will, in particular, bring along important changes regarding the taxation of real estate investments made by Luxembourg companies through dedicated French investment vehicles.
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 is included in the DTT: the aim of the DTT is the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for 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 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.
Discover more: New France-Luxembourg double tax treaty
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The DTT introduces significant changes, especially for real estate investment in France. Luxembourg taxpayers with investments in France or that plan to invest in France should seek advice from their tax adviser in order to analyse the potential impact of the new provisions on their investments.
