Franco-German Tax Treaty: amendment of 31 March 2015

3 minute read
13 April 2015

After the amendment to the Franco-Luxembourg Tax Treaty of September 2014, it is now the turn of the Franco-German Tax Treaty, with an amendment concluded on 31 March 2015.

This makes the following changes to the taxation of real estate investments made by residents of Germany in France:

Taxation by France of capital gains on disposals of shares in companies holding mainly French real estate realised by German investors (33.33% tax rate)

The amendment gives France the right to tax capital gains realised by persons who are resident in Germany for tax purposes on the sale of shares in a company whose value is derived mainly from real estate assets located in France (directly or indirectly). In practice, the provisions of article 244 bis A of the French Tax Code, that provide for tax on disposals at a rate of 33.33% (if the person making the disposal is a company), will apply.

The amendment therefore abolishes the exemption in France of such capital gains on real estate permitted by the current Franco-German Tax Treaty: this is now the case for the Franco-Luxembourg Tax Treaty as a consequence of the amendment of 5 September 2014 mentioned above. However, the situation differs considerably from that in Luxembourg, as in Germany this type of capital gain was usually taxable.

Note that disposals of shares in companies whose buildings are assigned to their “own business activity”, such as hotels, do not fall within this French right of taxation.

Taxation in France at a rate of 30% of dividends paid by SIIC/OPCI vehicles to German shareholders who hold at least 10% of the capital (directly or indirectly)

Prior to this amendment, it could be argued that dividends paid by a SIIC/OPCI to German residents would benefit from the reduced rate of withholding tax of 15% (although this position was challenged by the tax authorities).

Following the 2008 agreement with the United Kingdom, this is the second tax treaty in which France has now introduced such a provision governing SIIC/OPCI dividends. Note that this particular clause is not included in the amendment to the Franco-Luxembourg Tax Treaty of 5 September 2014.

Entry into force

Subject to its ratification in 2015, this amendment will apply from 1 January 2016 (as will the above-mentioned amendment to the Franco-Luxembourg Tax Treaty).

New amendments to other tax treaties on the way?

The stipulation of this amendment reflects the desire on the part of France to amend the provisions of older tax treaties, especially as regards real estate, in order to permit the taxation in France of the capital gains realised on disposals of shares in French property companies and of the income of real estate vehicles that are exempt from corporation tax in France (SIIC, OPCI).

The French Finance Ministry will therefore continue to attempt to conclude such amendments, in particular with states where the current tax treaties do not provide for the taxation of capital gains on disposals of shares in property companies in the state where the real estate is located. 

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