French social security contributions for non-French tax residents: potential tax refund

Since August 2012, non-French tax residents have been subject to social security contributions in France, such as CSG/CRDS, which are levied on real estate profits (i.e. capital gains on the disposal of a property in France and French rental income) currently at a rate of 15.5%.

CSG/CRDS (and ancillary taxes) are allocated to the French Social Security Budget, although they are technically treated as taxes. Some taxpayers have raised the fact that France does not have the right to levy these taxes for individuals who are not working in France. Indeed, pursuant to EU regulation 1408/71 (now 883/2004), subject to certain limited exceptions, an individual working in EU countries, Norway, Liechtenstein, Switzerland or Iceland only has to pay social charges in the State where he undertakes his main professional activity.

The French Supreme Court requested a ruling from the European Court of Justice ("ECJ") in order to know whether these levies fall into the definition of social charges mentioned in the EU regulation (Case C-623/13 Ministre de l’économie et des finances v. Gérard de Ruyter). In a decision dated 26 February 2015, the ECJ decided that CSG/CRDS (and ancillary taxes) fall within the scope of the EU regulation as these levies are allocated to the Social Security Budget irrespective of the fact that they are treated as taxes in France.

Based on this decision, France should no longer be allowed to levy these taxes for EU workers (as well as individuals working in Norway, Liechtenstein, Switzerland and Iceland). These EU workers should normally be treated as non-French tax residents. Therefore, capital gains on the disposal of a property in France and French rental income should no longer be subject to CSG/CRDS and ancillary taxes.

Our recommendation

We recommend that eligible taxpayers file a claim as soon as possible within the period allowed by the statue of limitations. Taxpayers have until 31 December of the second year following the one during which the tax was paid to file such a claim for a refund of the amount paid.

It should be noted that there are also some tax refund opportunities which might be available for non-EU tax residents.

Tax treatment of dividends received by a parent from a company through a partnership

The French Tax Code provides that dividends received by a company owning at least 5% of the share capital of the distributing company will be tax-exempt, save for a lump-sum amount equal to 5% of the dividends ("the participation-exemption regime").

Parent companies may own the subsidiaries' shares indirectly through another entity such as a partnership. This was the case in a recent decision of the French Administrative Supreme Court.  In that case, a French company, Artemis SA, owned 98.32% of Artemis America, a US general partnership, which in turn owned more than 10% of a US company, Roland.  The question that arose was whether the participation-exemption regime was applicable.  The Supreme Court found that the regime was not applicable for several reasons, but we will focus on one of them which could be of interest in relation to the application of other French tax provisions.

The Supreme Court confirmed the rule which has to be followed when dealing with a transaction involving a foreign legal person.  In such a case, it is necessary to consider which French legal person the entity most closely resembles, based on its legal characteristics and its operating rules.  Foreign tax rules are irrelevant.

The Supreme Court ruled that the US general partnership in this particular case was similar to a French partnership (société de personnes), which is a semi-transparent entity for French tax purposes. The Court’s reasoning was that (i) the US general partnership was not a corporation and (ii) it had a legal personality distinct from its shareholders. As a result, the French parent company could not be considered to own the subsidiary’s shares directly, since a partner in a French partnership is not deemed to own directly the partnership’s underlying assets. Therefore, the participation-exemption regime was not applicable.

Our recommendation

French companies should carefully review their ownership structure in order to make sure that dividends received can benefit from the French participation-exemption regime.

More generally, this case established the principle that a US general partnership should be treated in the same way as a French partnership.

Real estate: amendment to the France/Germany tax treaty

On 31 March 2015, France and Germany signed a fourth amendment to the income tax treaty which involves significant changes for German real estate investors.

Capital gains on sale of shares in real estate companies

The fourth amendment modifies the article relating to capital gains on the sale of shares in real estate companies. In particular, the amended tax treaty provides that the capital gain arising on the transfer of shares or rights, where more than 50% of their value results directly or indirectly from real estate assets, are taxable in the State where the assets are located. Immoveable property used in the conduct of a company’s business is not taken into account in determining the 50% ratio.

This new provision allows France to tax the transfer of shares in French real estate companies, whereas the right to tax was previously granted to Germany if the seller was a German tax resident.

Distributions from real estate investment vehicles (French SIIC-type REITs, French OPCI-collective undertaking for real estate investment)

The amended tax treaty also introduces a new provision dealing with distributions from real estate investment vehicles. Distributions made by real estate investment vehicles to a beneficial owner who holds (directly or indirectly) 10% or more of the vehicle’s share capital, are subject to the withholding tax rate set by domestic law (which is 30% in France).

This means that distributions made by these entities cannot benefit from the reduced withholding tax rate if the shareholder holds 10% or more of the vehicle.

Our recommendation

The new tax treaty provisions will apply to capital gains realised and distributions paid from 1 January 2016 at the earliest, if the ratification process is completed by the end of this year. As a consequence, existing structures should be reviewed in light of the new provisions of the tax treaty.