The new French-Luxembourg tax treaty: comments from the French tax authorities

Signed on 28 March 2018, the Treaty officially entered into force on 19 August 2019. The new provisions are applicable as from 1 January 2020.

This is the first French treaty signed according to the Multilateral Instrument (MLI) model. On 21 February 2021, the French tax authorities (FTA) published their related comments, providing useful interpretive guidance on this Treaty as well as other treaties based on the MLI model.

Guidance on the concept of residency

A first general limit is set. Even if a person qualifies as a resident within the meaning of the Treaty, a treaty benefit may still be denied on grounds notably of the principal purpose test (PPT) set forth in the MLI and incorporated into the Treaty. The Treaty also does not apply if one of the principal purposes of an arrangement or transaction is to obtain treaty benefits to get a more favorable treatment.

Moreover, the FTA adopts a restrictive approach to the concept of residency. Persons who are exempt from tax in Luxembourg or France under a tax regime based on their status or activities cannot benefit from the Treaty, following the respective position taken by the French supreme tax court. The FTA adds that persons who are subject to tax in a State only on income sourced in that State and on capital located therein are not considered residents of that State.

Characterization of residency of undertakings for collective investment

UCIs as such do not benefit from resident status. However, they can enjoy treaty benefits on the dividends and interest they receive and redistribute. For a UCI established in one of the contracting States that is comparable to a UCI under the legislation of the other State, the Treaty applies for the fraction of interest and dividends corresponding to the rights held by a resident of one of the contracting States or of a third State which has concluded a convention on administrative assistance to combat tax fraud with the income-source State.

An administrative tolerance is provided for “couponing”¹ . Income, whether of French or foreign origin, passing through a French UCI, may benefit from the reduced treaty WHT rate or from a tax credit reflecting that reduced rate

Characterization of residency of partnerships

A distinction must be made between Luxembourg and French partnerships. In France, partnerships (sociétés de personnes) are considered as “translucent”; they are not transparent and are themselves a resident in the treaty sense. On the other hand, Luxembourg partnerships are generally considered transparent.

A French partnership should therefore be able to benefit as such from the Treaty, unlike a Luxembourg partnership for which the treaty benefits will depend on the residency of its individual partners. The FTA has established a typology of situations (location of the partnership, residence of the partners, origin of the proceeds) detailing, for each scenario, the conditions of application of the treaty provisions.

¹Couponing consists of the issue of bonds or coupons by investment funds for the benefit of investors.

If you wish to discuss these topics, please contact: Fidal, Paris

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