The fiscal shock upon returning from vacation : The signing of the addendum to the treaty between France and Luxembourg !

France’s stubbornness may well have got the better of Luxembourg’s resistance! In an addendum signed on 5 September, France and Luxembourg have amended their fiscal agreement, thus bringing an end to 57 years of tax-exemption applicable to the capital gains from the disposal by a Luxembourg company of parts of companies which hold a property in France. This addendum shall be applicable once the ratification and notification process of the two countries is finalised and, if these processes are finalised quickly, shall come in to play from 1st January 2015 onwards. The world of real estate is taken aback! Despite having been announced in 2012, this news was a bombshell for foreign investors the majority of whom have structured their real estate investments over the past almost 20 years in Europe, and in particular in France, via structures located in Luxembourg. What should we expect next from this measure? Firstly, it is certainly not good news for those investors who will have to revise down their profit forecasts on their investments. As a reminder, corporation tax in France sits at 34.43% including social security contributions, making it the highest rate in the European Union. Secondly, we can expect, by the end of the year, anticipation of disposal programmes by investors who have structured holdings of their French real estate assets via Luxembourg and, thus, an increase in the number of transactions to ensure that the capital gains achieved still benefit from the exemption of the treaty before the addendum is applied. We can also expect to see some being tempted to restructure their asset holdings in order to raise their corporation tax exemption value or to relocate their existing investments to other countries which still offer an exemption on capital gains of disposal of parts of companies that are mostly real estate. Proceed with caution, however, when it comes to restructuring such operations! Treaties with other countries are not forever and we already know that serious negotiations are underway with Belgium on the Franco-Belgian treaty. Furthermore, the committee on tax fraud has repeatedly condemned restructuring operations which aimed at blocking, with no economic or heritage justification, the application of the preceding addendum to the Franco-Luxembourgian convention which made it possible to tax capital gains in France resulting from the disposal by a Luxembourg company of a property located in France. Is this the end of Luxembourg? We don’t think so. Luxembourg continues to be an attractive place for investment funds with competent professionals and well-designed and competitive regulation on offer. It must also be said that those funds have formed significant teams and logistics in Luxembourg over the years therefore making it difficult to envisage relocation to other countries simply due to the signing of this addendum. Does that mean that France’s attractiveness will suffer as a result? In our opinion, no, because it does not change the quality of the French real estate market at all but it will definitely have an impact on the structure of foreign investors. Other avenues are already being explored...