This article first appeared in STEP Journal Volume 24/Issue 9.
With one eye on an upcoming supreme court decision, tax residents of third-party states have the opportunity to claim a rebate on social contributions in France, Frederic Mege explains.
In addition to French income tax and capital gains tax (CGT), French tax residents are subject to direct taxes called 'social contributions' (not to be confused with national insurance contributions), which are made up of four different taxes, the combined rate of which is now 15.5 per cent (as of 1 July 2012). These contributions were created to generate an additional source of revenue to fund the expensive French healthcare system, but, since their creation they have been continually increased and extended for various reasons.
These contributions apply in addition to income tax on rental income and CGT on sales. It should be noted that social contributions only concern unfurnished lettings; they do not apply in respect of furnished or seasonal lettings, which are taxed differently as business profits.
In France, CGT on a sale is calculated at 19 per cent, but this increases to 34.5 per cent when social contributions are included. Under the current regime, no tax is due if the property is sold after an extended period of ownership of 30 years. After 22 years of ownership, CGT is not due, but the social contributions remain payable (albeit with higher taper relief available).
Which legislation applies?
In a February 2015 case, the Court of Justice of the European Union (CJEU) held that French social contributions paid on income derived from capital (as opposed to income deriving from a professional activity) fall within the scope of article 13 of Regulation (EC) No 1408/71 (the Regulation), which provides that people to whom the Regulation applies shall be subject to the legislation of a single Member State only.
Under the Regulation, France cannot require people who are already subject to social contributions in the state of their residence or in which they carry out a professional activity to pay extra social contributions in France.
Clearly, the decision of the CJEU primarily benefits EU, European Economic Area and Switzerland residents. However, residents of third-party countries should be able to claim reimbursement of French social contributions previously paid on one of two grounds:
- France has signed many international social-security agreements that prohibit the application of overlapping legislation. Such an agreement may be relevant to the taxpayer's state of residence.
- It may be possible to rely on the EU-law principle of freedom of movement of capital. If EU residents are subject to more favourable tax treatment than non-EU residents, this could constitute a restriction on the freedom of movement of capital, and therefore may be contrary to EU law. Non-EU residents would be able to benefi t from this.
For the first time, a French court has ruled on the application of social contributions in respect of residents of third-party states. In a decision dated 25 March 2016, the Administrative Court of Appeal of Marseille (the Court) stated that, in the present case, the application of social contributions to residents of third-party states constitutes a restriction in the freedom of movement of capital. In this case, the Court had to deal with the singular situation of French nationals resident in Monaco. The French tax authorities appealed against this decision.
Although there are outstanding issues and technical questions, and the decision of the Court will have to be confi rmed by the Supreme Court, this decision bodes well for the future.
Non-French tax residents who paid social contributions in 2014 have until 31 December 2016 to make a claim to the French tax authorities. Social contributions paid in 2015 can be claimed until 31 December 2017. Social contributions paid during or before 2013, however, may no longer be claimed.
While the position of residents of third-party states is not yet fully clear, we encourage clients to make claims anyway. A claim made after the deadlines above will be out of time even if, in the future, the Court's decision is confirmed.