“It does not appear that the new double tax treaty (DTT) really benefits the residents of Luxembourg or investors that have set up investment vehicles.”
Photo: Allen & Overy
On the occasion of the signing of the new double taxation treaty (DTT) between Luxembourg and France on 20 March 2018, the grand duchy’s finance minister, Pierre Gramegna, commented in a government press release that the new DTT is, “…an innovative instrument that will benefit both citizens and business in both countries.”
Jean Schaffner, tax partner at the law firm of Allen & Overy is not so sure. “It does not appear that the new double tax treaty really benefits the residents of Luxembourg or investors that have set up investment vehicles,” he stated in an interview as part of Delano’s Tax Talk series. He explained why.
“First, the DTT contains an anti-abuse rule. According to this rule, treaty benefits shall not be granted to a taxpayer if it is reasonable to conclude that obtaining treaty benefits was one of the principal purposes of any arrangement or transaction, unless it is established that this benefit would be in accordance with the object and purpose of the DTT. This opens the door for administrative interpretation and creates insecurity for investors.”
Further complication for Luxembourg employers comes from a provision of the new DTT on the taxation of employment income.
“The employment income of a French resident is taxable in France, unless the employer performs this salaried activity in Luxembourg. However, if a resident of France is present in France, or in third countries, for his/her employment for periods exceeding 29 days per year, he/she will be considered as performing this professional activity in France during the entire fiscal period and France will have the right to tax the relevant salaried income.”
According to Schaffner, this provision is problematic for Luxembourg companies employing cross-border workers from France, who exercise their activity not only in Luxembourg but have to travel for their profession, to visit clients, etc.
The definition of residence under the new DTT excludes from treaty benefits entities which are not subject to tax. Schaffner explained, however, that, “Collective investment schemes may benefit from the DTT provisions, such as, dividends and interest in proportion to their unit-holders who are residents of France, Luxembourg or any state having entered into a treaty containing an administrative assistance provision.”
He adds, “This provision, which is burdensome and restrictive, penalises Luxembourg investment funds with a large investor base. It is however an improvement compared to the old treaty, where Luxembourg funds were simply excluded.”
Compared to the current DTT, Luxembourg no longer exempts dividends received from a French vehicle in case a substantial participation is held, therefore, “In the future, dividends received by a Luxembourg corporate investor from certain French investment funds which were considered as residents under the old treaty, might no longer be exempt in Luxembourg. This provision is detrimental to certain investments into French real estate funds, for example.”
“Similarly, France will apply a higher withholding tax on dividends paid by such real estate funds under the new DTT”, 15% or 30%, as opposed to 5% in the past, in most cases.