In a decision dated 20 October 2014 (CE n°367234, SCI Saint-Etienne), the French Administrative Supreme Court confirmed that the withholding tax of one third which is applicable on real estate capital gains realized by non-EEA resident individuals violates the free movement of capital. This decision creates an opportunity to claim a refund for non-EEA partners of a French real estate company (Société Civile Immobilière - SCI) which has sold a real estate asset located in France. The opportunity to file a claim should be analyzed as soon as possible for all withholding payments made since 1st January 2012 (claims relating to year 2012 must be submitted in 2014). The refund to be claimed corresponds to the tax differential between the rate of 33.1/3% and 19%.
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Which is the concerned legal scheme?
Non French tax resident individuals who hold shares in a French SCI which sells a real estate asset located in France, are subject to a flat and definitive withholding tax based on their share of the capital gain realised. The applicable rate depends on their tax residence (Article 244 bis A of the French Tax Code - FTC). Tax residents of a EU Member State or of a State of the European Economic Area (EEA) which has concluded with France an administrative assistance agreement enjoy a 19% rate (16% until 31 December 2010); while tax residents of other States are subject to a 33.1/3% rate.
What was the litigation point?
EU tax resident individuals (or EEA with administrative assistance agreement) having shares in a French SCI on the one hand, and non-EEA tax resident individuals also having shares in French SCI on the other hand, are treated differently with respect to French real estate capital gains they realise through the French SCI. Such difference in treatment could be regarded as a restriction of the free movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the EU (TFEU). Free movement of capital may be invoked by States outside the EU.
What is the bottom line in the French Administrative Supreme Court’s decision?
The French Administrative Supreme Court confirms the following:
- these provisions constitute a restriction of the free movement of capital (Article 63 TFEU) because they reduce the rate of return of an real estate investments in France.
- the "standstill clause" (Article 64 TFEU) could not be applied because the difference of treatment at stake has not existed continuously in French law since 31 December 1993, and
- the "safeguard clause" (Article 65 TFEU) could not be applied either because the difference of treatment at stake affects taxpayers who are not in an objectively different situation.
What is the scope of this decision?
For the future, this decision confirms that the tax burden applicable to individuals residing in a non-EEA State which entered into an administrative assistance agreement in France, who sell a French real estate asset through a French SCI, should be limited to 19%.
For the past, this decision creates an opportunity to claim a refund for non-EEA partners of a French SCI which has sold a real estate asset located in France. Withholding payments made since 1st January 2012 should be analyzed because a partial refund of the tax withheld may be claimed. A claim relating to year 2012 must be filed in 2014; as from 1st January 2015, only withholding tax payments made since 1st January 2013 could be reclaimed. The refund to be claimed is the tax differential between the rate of 33.1/3% and 19%.
What about other situations?
Some cases of direct transfer of a real estate asset located in France or of shares in French SCIs may also provide opportunities for a claim, depending on the seller’s tax residence.
What about social security contributions?
Should a taxpayer file a claim regarding the tax differential between the rate of 33.1/3% and 19% based on such new case law, the opportunity should be reviewed to also claim for a refund of social taxes paid on the same real estate capital gain (at a rate of 15.5%)!