The Grand Duke of Luxembourg paid a state visit to France between 19 and 21 March, during which several agreements between France and Luxembourg were signed. Among these agreements is a new convention for the avoidance of double taxation and the prevention of tax evasion and tax fraud with respect to taxes on income and wealth. This new agreement introduces for the French shareholders of Aircraft Operating Luxemburg’s Companies a fundamental modification, which is likely to modify their initial choice at short notice.
As regards the operation of aircraft, the previous convention, signed on 1 April 1958, provided in article 6 that: By way of derogation from Article 4 of this Convention, profits derived by an enterprise of one of the two Contracting States from the operation of aircraft shall be exempt from tax in the other Contracting State. This clearly meant that it was possible to domicile an aircraft operating company in Luxembourg even though its activity and direction was exercised on French territory without being subject to the French tax duty. Despite the clarity of this text, the French administration has, for several years, initiated tax proceedings against Luxembourg companies operating in France by referring to the notion of permanent establishment contained in Article 4 of the same Agreement.
The new convention, which will come into effect on January 1, 2019, will have the merit of clarifying the debate.
The new text, which appears under Article 8 of the new Convention, provides in paragraph 1:
Profits from the operation of ships, aircraft or railway vehicles in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. This means that the administrations of the two countries will, in order to tax the profits of the aircraft operating companies, endeavour to show that their management seats are within their borders without having to resort to the other criteria of residence contained in Article 4 of the new Convention.
It remains eight months to adapt to these new rules. If they do not do so, shareholders of aircraft operating companies, tax residents of France, will soon be exposed to tax audits that may lead to heavy financial and criminal penalties.
Remember that today the tax rates of the two countries are comparable and that the tax interest to operate from Luxembourg is limited.
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