Arsene Taxand - Real Estate

August 2, 2006: Amendment to the France/Luxembourg tax treaty

The Luxembourg tax authorities (Administration des contributions directes) have just announced on their website that a second amendment to the France-Luxembourg Tax Treaty of April 1, 1958 was signed in July 2006.

This amendment confirms the predictable end of the "La Costa": from now on, profits, revenues and capital gains resulting from the use and sale of real property will be taxable in the State where the property is located regardless of whether the owner of the property is an individual or a company. Whether or not this property is allocated to a permanent establishment in the State where it is located will not have any impact. In our opinion, these new provisions should not govern the sale of shares of predominantly real property companies with legal personality.

From now on, each State will have to implement the procedures required to bring this amendment into force. The provisions of the amendment will apply to the revenues relating to any calendar year or any fiscal period beginning after the calendar year in which the amendment comes into force. In other words, if the amendment comes into force in 2006, it will apply to any revenue generated from January 1, 2007 onwards or during the first fiscal year beginning from such date.

In any event, France and Luxembourg have clearly demonstrated their eagerness to put an end to the current situation as soon as possible. The consequences of these measures must now be rapidly anticipated and fall-back solutions entailing adaptations must be implemented to make it possible to limit the effects of the agreement between the two States.