DTT 4.0: New Double Tax Treaty between France and Luxembourg

ABBL Published 23.03.2018

On 20 March 2018, at the occasion of the State visit of H.R.H. Grand Duke Henri of Luxembourg to Paris, the governments of France and Luxembourg signed a new double tax treaty (the “New DTT”). This new treaty is to eventually replace the current double tax treaty dated 1 April 1958.

The ABBL has reviewed a non-official version of the text of the New DTT. Pending further analysis and the publication of an official version in the coming days, a series of points of attention can be noted on a preliminary basis.

The New DTT is based on the 2017 OECD Model Tax Convention, which reflects the latest internationally-agreed standards in the field of international taxation derived from the OECD BEPS Action Plan. A strong emphasis is thus put on anti-avoidance provisions. The New DTT notably contains a general anti-avoidance rule – the Principal Purpose Test (PPT) – a subjective test aimed at denying treaty benefits if obtaining such benefit could have been one of the principal purpose of a given arrangement or transaction. The New DTT also contains a rather unusual clause allowing for the unilateral application of a series of anti-abuse and anti-avoidance provisions under French tax legislation to situations and arrangements covered by the New DTT.

A point of attention for financial institutions with operations in France and/or serving the French market relates to the wider definition of the concept of permanent establishment which notably covers circumstances where contracts are substantially negotiated in France by a dependent agent and are merely authorized in Luxembourg. This outcome reflects the full terms of the OECD BEPS Multilateral Convention, notwithstanding the reservations notified by Luxembourg upon signature of the said convention.

Changes to the treatment of distributions made by a French real estate vehicle also constitute a point of attention, given the significantly higher rates of French withholding tax applicable on such distributions under the New DTT.

A protocol to the New DTT clarifies the regime applicable to salaries paid to individuals residing in France but pursuing employment in Luxembourg. Under the terms of this protocol, Luxembourg should retain full taxation rights on such salaries in cases where a French-resident individual working for a Luxembourg employer exercises his/her functions in another State (France or a third State) for a period not exceeding 29 days in total per year. In addition, the New DTT specifies that the right to tax statutory pensions (1st pillar) remains with the source State.

The ABBL will now analyze in detail the concrete impact of the New DTT on members’ operations ahead of its entry into force. The members of our Fiscal Affairs Committee were given the opportunity to exchange views regarding key provisions of the New DTT with a representative of the Ministry of Finance in the course of a meeting organized on 22 March 2018.

It shall be noted that the New DTT will enter into force after the notifications regarding the ratification by each Contracting State have been exchanged. This could possibly take place on 1 January 2019

By Camille Seillès, Secretary General

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