With the fourth amendment to the treaty due to come into force on 1 January 2017, some two and a half years after it was signed, it is clear that the changes primarily affect investment in French real estate by Luxembourg entities – and even then, not all players are affected in the same way.
While this will undoubtedly affect some investors in French real estate, the asset management industry need not worry too much for the moment.
Under the amendment, a Luxembourg seller disposing of shares in French real estate entities (FREE) will effectively now pay capital gains tax in France under standard French rules, amounting to around 34% for the whole period that the seller held the shares. Previously, the capital gains on the disposal of such an investment were only taxable in Luxembourg.
Under the revised treaty, a FREE can be defined as an entity whose assets are predominantly made up of French real estate, or that derives more than 50% of its value from French real estate.
This has naturally caused some concern among investors. However, the amendment will affect different investors in different ways. The most affected are likely to be ordinary FREE companies who may need to restructure their approach to investments over the next year, or find a decent exit from the market by the end of 2016.
Investors in French real estate through listed companies or through real estate alternative investment funds such as Organismes de Placement Collectif Immobilier (OPCI) organised under the form of Sociétés de Placement à Prépondérance Immobilière à Capital Variable (SPPICAV) will continue to enjoy most of the advantages through the revised treaty.
The change does not affect all companies that own real estate. For example, it will not have any impact on sectors like luxury hotels, or vineyards, if the value of the non-real estate assets such as brand, customers and goodwill exceed the value of buildings or land.
In these cases, any sale will be treated just the same as the sale of shares in other companies; any capital gains will continue to be taxed exclusively in Luxembourg.
There is thus no reason for this new tax environment to keep international investors away from the French market as a whole; nor from the French real estate market in particular, and it should not affect the important role that Luxembourg plays for investors and asset managers looking to allocate funds for projects in France or in French companies.
Luxembourg will remain a hub for stable capital flows and for equity investors both inside and outside of the European Union, in listed or non-listed companies. In a sense, Luxembourg holding vehicles should be seen positively by France, due to the capital they continue to attract to the country.
Having said that, there may yet be further changes to the treaty, as ministers have already indicated a wish to further adjust tax arrangements between the two countries. But as yet there is no strong reason for concern in the industry.
Franck Lagorce is a tax expert with Pinsent Masons, the law firm behind Out-Law.com.