You are a Luxembourg resident and have real estate assets in France (second home, rental investments, land, etc.). How will the introduction of the real estate wealth tax (since 1 January 2018) and the new France-Luxembourg treaty (due to enter into force on 1 January 2020) affect you?
Taxation in the country where the real estate is located
Even if the new France-Luxembourg treaty has not yet been ratified by Luxembourg (as at May 2019) it will in all likelihood enter into force on 1 January 2020.
Article 21 of the treaty provides that real estate assets are taxable in the State where they are located.
- Real estate assets held in France by a Luxembourg tax resident are therefore taxable in France.
- The other components of an individual’s personal wealth are taxable in that person’s country of residence. A securities portfolio composed of French securities held by a Luxembourg resident will therefore be taxable in Luxembourg where individuals are no longer subject to wealth tax.
Taxation of company shares, in particular shares in an SCI (real estate investment company)
The France-Luxembourg treaty does not specifically address the case of “company shares”, meaning that various interpretations are possible. We will be discussing real estate investment companies (SCI). The other types of companies may also be analysed in the same way (SA (public limited company), SARL (private limited company), etc.).
- A first interpretation consists in considering that SCI shares are movable assets and not immovable assets. SCI shares are not in themselves immovable assets since they represent only the proportion of the real estate assets and rights held by the SCI that is taxed.
- A second interpretation takes account of the company’s tax regime: fiscally transparent1 (meaning that such an SCI does not have a tax personality separate from that of its shareholders) or fiscally opaque (meaning that such an SCI, although not subject to corporate tax, does not meet the conditions of fiscal transparency). In the case of a transparent company: the tax treatment would be based on the real estate: The Luxembourg resident would therefore be taxed on the French real estate held via the SCI. With an opaque SCI, the tax treatment would be based on the shares: France would therefore not have a right of taxation.
- A final interpretation consists in treating SCI shares as real estate for tax purposes (for the proportion of the representative value of the real estate held), in which case they are taxable in the State where said real estate is located. On that basis, a Luxembourg resident would be liable for the IFI on his or her real estate assets2 held in France via an SCI. This point of view reflects in particular the reservation made by France in the 2017 OECD model convention, which has been used as the basis for the new France-Luxembourg treaty. France thus indicated that it wanted shares in companies investing predominantly in real estate not to be considered as another component of personal wealth (and therefore, by extension, that they should be treated as real estate). It is not easy to establish the scope of this reservation because, in particular, the concept of “investing predominantly” (where more than 50% of the company’s assets are real estate) is irrelevant for the real estate wealth tax 2 (where the real estate component is taken into account regardless of its proportion).
How can you best assess the impact of these new tax measures on your personal situation?
Which of these three interpretations of the France-Luxembourg treaty should be followed? There are two possible options and approaches:
- Ask the tax authorities for an advance ruling in order to ascertain how they interpret the application of the rules in relation to your personal situation. It is possible that the tax authorities may opt for the last interpretation.
- Circumvent the issue (i.e. less than EUR 1.3 million of net real estate assets) by taking advantage of the provisions of French domestic law.
Article co-signed by Anne-Lise Grandjean, Luxembourg tax specialist, and Romain Biron, French tax specialist.
1 Article 1655 ter of the French General Tax Code
2 The Real Estate Wealth Tax (“IFI”) applies to French residents having real estate assets in excess of EUR 1.3 million net and French non-residents having real estate assets “in France” in excess of EUR 1.3 million net (subject to double taxation conventions).