When buying real estate in France, fund managers usually make a detour into Luxembourg. They use Luxembourg companies to purchase shares in French companies, which ultimately own the real estate assets. The extra effort has paid off in the past, because the France-Luxembourg Tax Treaty gives a tax exemption to the Luxembourg company when it sells the French shares.
Last September, however, the French and Luxembourg Ministers of Finance amended the treaty. Now, Luxembourg companies will incur a capital gains tax when exiting a French real estate company. The new provisions may apply as early as January 1, 2016.
Freddy de Petter, Luxembourg-based international tax structuring specialist at fund administrator Vistra tells pfm that, while the amendment is a setback, fund managers can get around it with some clever restructuring.
Does the amendment in the French-Luxembourg Tax Treaty bring an end to tax efficient real estate structuring in France?
de Petter: No. The amendment adds a new paragraph to Article 3 of the treaty. This will lead to a tax on the sale of shares in an entity (located in France, Luxembourg or any other jurisdiction) of which the assets are predominantly composed of immovable properties located in France or that derive, directly or indirectly, more than 50 percent of their value from such properties. As a result, the capital gains will be taxable in France at the rate of 34.5 percent.
It is anticipated that a lot of French real estate structures will be amended during 2015. During the course of 2015 it is still possible to restructure without incurring capital gains taxation on the transfer of the shares of the French real estate company.
What kind of solutions can an investor in French real estate use?
Various solutions are available depending on the size of the real estate investment and the residence of the ultimate real estate investor. One of the solutions is to route the structure through the Netherlands instead of Luxembourg using a “Dutch sandwich” structure.
In the structure, one Dutch company owns the shares of another Dutch company, and that second company owns the shares of the French real estate. The idea is that the first company sells the shares of the second when one intends to sell the French real estate so it is an indirect sale. By using such a structure, the capital gains can be realized free of Dutch and French capital gains tax. Belgium can also provide a similar solution.
For existing Luxembourg-French real estate structures, a restructuring can still be organized in the course of 2015 to the extent economic reasons are present. Some examples are as follows:
Contribution of the shares of the French real estate company into the Dutch (or Belgian) structure followed by a liquidation of the Luxembourg company
Transfer of the management and control of the Luxembourg company to the Netherlands followed by the interposition of a Dutch holding between the ultimate shareholder and the transferred Luxembourg company.
New French real estate investments can be structured by making use of the Dutch sandwich structure or a Belgian holding eventually owned by an ultimate Luxembourg holding company to avoid Dutch or Belgian withholding tax on upstream dividend distributions to the ultimate beneficial owners.
Do you think this will lead to any slowdown in the French real estate market?
I don’t think it will give rise to a slowdown as long as people are making use of the most efficient investment structures. The only point of contention is the French anti-avoidance legislation. If you try to restructure without a significant economic reason, the French tax authority won’t allow that.