Luxembourg companies that hold property in France
Written by Professor Robert Anthony and Christophe Maulny, Anthony & Cie
Offshore Investment (#211), November 2010
The Franco-Luxembourg tax convention 1 April 1958
Traditionally, owning a property located in France through a Luxembourg company creates an international tax issue, not only in France, where the property is located, but also in Luxembourg, where the company is domiciled, on which income or capital gains generated by the property can be taxed.
The Franco-Luxembourg tax convention of 1 April 1958 (the convention) was somewhat unusual. Interpretation of the convention as well as subsequent interpretations of Luxembourg and French tax law, resulted in an unexpected divergence.
Article 4.1 of the convention stated that the income of a company, head office of which was situated in Luxembourg, was taxable in the Grand Duchy of Luxembourg. However, this rule did not apply if the company had a permanent establishment in France. The French Council of State then ruled that simply holding a property in France did not constitute a permanent establishment.
Income deriving from a property situated in France, which was received through a Luxembourg company, was not taxable in Luxembourg (La Costa case, 23 April 2002). Therefore, not only was it fiscally very attractive to own or purchase a property in France through a Luxembourg company, but it was also interesting from an inheritance and capital gains planning perspective.
The difference in the comparative laws meant that both capital gains on the transfer of, and income arising from, a property situated in France, received through a Luxembourg company were taxable neither in France nor in the Grand Duchy.
At the time, comparative law exonerated taxation of income arising from French property held by a Luxembourg company.
As a result, owners of French properties held by Luxembourg companies were in the enjoyable position of being doubly non-taxable! Extraordinarily, the convention enabled property income or capital gains to be received through Luxembourg companies totally tax free.
According to the standard tax convention, income received from a property held by a Luxembourg company and located in a country with which Luxembourg has signed a tax convention, is taxable in the country where the property is situated.
Amendment 24 November 2006
Faced with this situation, France put pressure on Luxembourg to change its agreement.
The amendment of 24 November 2006 revoked the double exemption from which income and capital gains tax on properties, situated in France, and held directly by Luxembourg companies.
The amendment ended the ‘La Costa’ case. Benefits, income and capital gains from the exploitation and transfer of real estate became taxable in the jurisdiction where the property was located, whether the owner was a private individual or a company.
Consideration was no longer given to whether the property has a permanent establishment in the jurisdiction in which it was located.
Ratification of the second amendment to the Franco-Luxembourg tax convention, on 27 December 2007, did not signal the end of Luxembourg companies holding property in France. With careful tax planning, the purchase and transfer of a property through a Luxembourg company remains possible and still has advantages.
Luxembourg still remains advantageous for property investment in France.
Why investing in property in France through a Luxembourg company remains advantageous?
Luxembourg remains an attractive jurisdiction for property investment in France for the following reasons:
– Flexible and stable structures, comprehensive and stable company legislation and a sound banking environment.
– The language and comparative law facilitate management and transfer.
– There is a total exoneration in Luxembourg on taxation of income from property arising abroad although this may be taxable in the country of the property.
– There is an exoneration of interest paid by a Luxembourg property company.
– Access to parent subsidiary directives enables distribution and exoneration on dividends arising in France and paid in Luxembourg (subject to conditions).
– Access to the interest directive enables intra-group debt or loans towards an ad hoc structure with the objective of reducing the taxable base in France.
– No tax on capital gains arising from the transfer of the shares of a company which has been predominantly set up to hold property under corporate taxation.
– Fiscal transparency of SCI (Société Civile Immobilière) was confirmed by the second amendment and the transfer of the parts are still free from capital gains both in Luxembourg and France.
The final point provides important legal and tax security for French SCI’s that are held by non-residents in comparison to the UK (where the tax administration considers that income received by such companies must be treated as dividends, and is therefore subject to double taxation). Obviously, this is very general analysis and each situation should be dealt with on a case by case basis.
Practical consequences of the new amendment in France for Luxembourg companies from a tax and accounting point of view
1/ Articles 3 and 4 of the Franco-Luxembourg tax convention, as amended 24 November 2006, state that income from property is taxable in the jurisdiction where the property is located. This became effective for companies on 1 January 2008. This was not the case previously.
2/ A Luxembourg company holding a property in France is now taxable in France on the income generated from this property. It should be noted that, according to the French Tax and Legal Administration, joint stock companies, in particular foreign ones, which own property in France and allow the owners to use it without charge, are taxable on the benefit in kind.This implies that it is compulsory to file a tax declaration and in particular to provide a corporate tax return for the Luxembourg entity, as this is necessary for all corporate entities.
3/ The fiscal declarations imply that French business accounts should be held. It is important to keep full accounting records in France. As the company is a Luxembourg company, the French accounts are only held to support the French tax declaration; the company is also required to keep accounts in Luxembourg (in accordance with the local laws).
4/ There is no obligation to have a tax representative in France.
5/ Since this structure concerns French civil companies which are subsidiaries of Luxembourg companies, it is wise to nominate in France to avoid any misunderstanding that the company is fictional (which could result in the non-exoneration of the capital gains on the transfer of the shares in France).
In conclusion, Luxembourg still represents for many wealth management advisors and other professionals, an ideal solution for structuring property investments in France, depending on the jurisdiction of residence of the ultimate shareholder concerned. Although the amendment of 24 November 2006 put a definitive end to the major fiscal advantages, it has not put an end to the attractions of Luxembourg for property investments in France. There are still many great opportunities, depending on the structure of the investment company. In order to receive the appropriate advice, considering the complexity of the structures, it is highly recommended to take advice from a recognised advisor.
We strongly recommend using the services of a professional and nominating a manager or co-manager in France to take care of the tax declarations and accountancy matters involved.
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