French real estate holdings through Luxembourg vehicles may need to be revisited, says expert

Out-Law News | 09 Mar 2015 | 2:46 pm | 2 min. read

Structures for  investments from overseas investors in French real estate that involve Luxembourg vehicles may need to be restructured if an expected change to the double tax treaty between France and Luxembourg takes effect, an expert has said.

Franck Lagorce, a French real estate international tax expert at Pinsent Masons, the law firm behind Out-law.com made the warning when addressing a conference organised by ASPIM (Association Française des Sociétés de Placement Immobilier) in Paris last week.

The change to the capital gains article of the France/Luxembourg double tax treaty of 1 April 1958 was agreed in a Fourth Protocol to the treaty that was signed in September 2014, but has not yet come into force. The effect of the change is that a Luxembourg company will be taxed in France on capital gains made on the sale of an entity whose assets predominantly comprise French real estate or derive directly or indirectly more than 50% of their value from French real estate.

Franck Lagorce said: "The double tax treaty change is a genuine business issue internationally as for a number of years most players have chosen Luxembourg vehicles to invest in real estate in, among other countries, France - one of the most important real estate markets in Europe. Luxembourg vehicles are frequently used as a conduit by investors from outside France or Luxembourg – with many of the master funds situated in the UK and structured as UK Limited Partnerships (LPs) or Scottish LPs."

"The treaty change is already influencing some large transactions on the French market. Share deals are being rushed through and some portfolios are being placed on the market because of this change," Lagorce said.

He explained that under the current system, although capital gains on disposals of real estate held directly by a Luxembourg company have been taxed in France since 2008, sales by Luxembourg entities of shares in companies that own French real estate are still not taxed in France. The current double tax treaty provides that the gains can be taxed in Luxembourg, where internal rules usually leave quite a reasonable tax liability in the Grand-Duchy.

One very popular structure over the last 10 years for holding French real estate has been for the property to be held by a French Société Civile, owned by a Luxembourg entity, Lagorce said. Under this structure, the sale of the asset by the Société Civile is subject to French corporation tax when the property is sold but not when the Luxembourg company sells the Société Civile. He said that when the double tax treaty Fourth Protocol change comes into force, the Luxembourg entity will be taxed in France, subject to French corporation tax at 34%. He said other structures affected by the change include those where a Luxembourg entity holds French real estate through a French tax paying company or through a Luxembourg company.

Lagorce said that the date the change takes effect will depend upon when the ratification of the treaty changes in each country is notified: but the change will not have effect until 1 January 2016 at the earliest; and if the last of the notifications does not occur before 30 November 2015, then the change will not come into force before 1 January 2017, at the earliest.

The fact that the change will not come into effect until 2016 means that investors using Luxembourg structures should act now during 2015 to revisit their investment strategy in French real estate; and/or accelerate arbitrations before 2015 year-end. He also said "One structure that remains efficient is to use a French non-listed REIT vehicle (an OPCI) to invest in France; either for existing investments, or for future projects."