(French Administrative Supreme Court, 9th and 10th subsections together, Apr. 11, 2014, no. 332885, Ministère des Finances et des Comptes Publics vs. Lappe)

A Monaco tax resident, German national, who owned real estate property in France, Alpes-Maritime, was subject to income tax in France pursuant to Article 164 C of the French Tax Code which provides that non-residents are taxed on a flat-rate basis based on three times the rental value of their French real estate properties.

After a lower-court decision in the tax authorities’ favor, the Marseille Administrative Court of Appeal ruled in favor of the taxpayer’s claims because the Article 164 C of the FTC enacts a different tax regime based on nationality. Therefore, this article constitutes a restriction to the free movement of capital and an arbitrary discrimination, which violates Articles 63 and 65 of the Treaty on the Functioning of the European Union.

In support of its appeal to the French Administrative Supreme Court, the Minister of Finance and Public Accounts notably stated that there was no reason to compare the respective situations of residents and non-residents with respect to the free movement of capital and the objective of the disputed provisions was to make non-residents, like residents, subject to progressive income tax.

Insofar as the free movement of capital notably includes the acquisition, holding and sale of real estate in the territory of another Member State not related primarily to carrying out an economic activity or to the active management of real estate assets, the French Administrative Supreme Court ruled that the purpose of Article 164 C of the FTC is to make the ownership of real estate property in France subject to taxes that are due only by persons who do not have their tax domicile in France. Thus this Article dissuades non-residents from acquiring or holding such property in France and represents an obstacle to the free movement of capital.

Furthermore, the French Administrative Supreme Court points out that the treaty gives to the Member States the right to apply provisions of their national tax legislation that create distinctions between taxpayers who are not in the same situation (notably as regards their tax residence), provided that such fact does not constitute either a means of arbitrary discrimination or a disguised restriction to the free movement of capital. However in assessing this distinction the French Administrative Supreme Court affirms that we must compare the respective situations of residents and non-residents with respect to the provision that is an obstacle to the free movement of capital.

Lastly, the French Administrative Supreme Court noted that the desire to make residents and non-residents subject to the same progressive tax, which applies to property that is not likely to produce income, ends to make non-residents subject to a flat-rate tax. Moreover, it then pointed out that this restriction is not motivated by an overriding public interest.