The last few months have seen some positive and interesting developments regarding French capital gains tax (CGT) applicable to non-French tax residents.
The first relates to the social contributions applicable on gains made on the sale of a French property (and rental income), and the second concerns the higher CGT rate applicable to certain residents.
In both cases, action should be taken before the end of 2014 in order to have any chance of claiming back any tax that was overpaid in 2012 (for a property sold in 2012).
Current CGT regime
French CGT has increased considerably in the last few years.
Generally speaking, French CGT on a profit made on the sale of French real estate (including the sale of shares of a French or foreign company owning French real estate) applies at a flat rate of 19% for EU residents and residents of the European Economic Area (EEA), i.e. residents of Iceland, Norway, Liechtenstein (and in certain circumstances, when the gains are made directly, to Swiss residents due to a particular provision contained in the Double Tax Treaty signed with Switzerland) and 33.33% for residents of other states.
In addition to CGT, since 2012 social contributions are due at a rate of 15.5%. These contributions have been applied on (1) French rental income earned as of 1 January 2012 and (2) French capital gains on the sale, directly or indirectly, of French real estate and/or shares in companies owning French real estate on or after 18 August 2012.
Therefore, in total, the following global rates apply depending on the residence of the seller: 34.5% and 48.83%.
Taper relief (at various rates) is available depending on the length of ownership of the property. Under the current regime, no tax is due if the property (or shares) 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 (but with a higher taper relief available).
There is a case currently pending before the Court of Justice of the European Union (CJEU), (Case C‑623/13 Ministre de l’Économie et des Finances v Gérard de Ruyter), whose decision might put an end to the application of the French social contributions on non-French tax residents.
In Europe, Article 13 of Regulation No 1408/71 provides that the persons to whom this Regulation applies shall be subject to the legislation of a single Member State only. This article lays down the prohibition against overlapping legislation.
In substance, in the present case, the CJEU has to decide whether Regulation No 1408/71 can apply to French social contributions which are levied on income from assets (income from real estate). In two judgments from 2000, the CJEU already confirmed that Regulation No 1408/71 applies to social contributions due on employment income and substitute income. Now it has to decide whether it applies on income from assets.
In her opinion dated 21 October 2014, the Advocate General Mrs E Sharpson gave a positive answer to this question. Previously, the European Commission also considered that the extension of social contributions to non-French tax residents was against EU law. We believe that it is likely that the CJEU will follow the opinion of its Advocate General.
In such a case, EU residents who have paid additional social contributions in France on a sale of French property (or on French rental income) should be able to claim back from the French tax authorities any social contributions paid in the past.
In this respect, the deadlines to make a claim must be considered and checked carefully as the rules are complex and seem to have recently changed. Until quite recently, it was generally accepted that taxpayers could make a claim up to 31 December of the second year following the tax year during which the contributions were paid (or the CGT liability was paid as the same rules apply in respect of CGT). However, in particular since a decision of the Administrative Tribunal of Paris dated 16 October 2013, the rules seem to have changed in a less favourable way for taxpayers.
The position now seems to indicate that taxpayers can make a claim up to 31 December of the year following the tax year during which the contributions were paid. Therefore, in respect of sales which occurred in 2012, the deadline to make a claim was 31 December 2013 and this date has now passed. Having said this, the rules are not entirely clear and there might be other arguments to interpret them differently and more favourably for taxpayers.
In respect of sales which occurred in 2013, the claim must definitely be made before 31 December 2014 to avoid any discussion with the French tax authorities as to whether the deadline has passed. In respect of sales which occurred in 2012, we believe that a claim should still be made anyway before the end of this year in order to secure any chance of claiming back any tax that was overpaid in 2012, as the question as to whether the deadline has already passed remains unclear.
In any event, taxpayers should not await the final decision of the CJEU to take action. Claims should be made even if the CJEU has not yet rendered its decision as a claim after 31 December 2014 would be too late, even if the CJEU confirms the non-applicability of the social contributions.
The situation is different in respect of social contributions paid on French rental income. A claim can be made up to 31 December of the second year following the tax year during which the tax bill was issued. This gives us more time for action.
Obviously, non-EU residents cannot benefit from Regulation No 1408/71, so a positive decision from the CJEU would not directly benefit them. However, for these taxpayers, the issue should be considered from a different angle.
Under EU law, can France treat EU residents and non-EU residents differently as far as French social constitutions are concerned? Assuming the CJEU rules a favorable decision, does that mean that non-EU residents could be treated differently and less favorably than the EU residents?
A similar issue has been raised in respect of the higher rate of tax of the CGT rate applicable to non-EU and EEA residents.
The higher rate of tax applicable to non EU and EEA residents
As mentioned above, French tax legislation treats taxpayers differently in respect of CGT rates depending on their state of residence. In particular, non-EU and EEA residents are subject to a higher rate of tax, which is currently being challenged through the courts on the basis that it represents a restriction on the free movement of capital.
In this respect, the French Supreme Court has just rendered a very positive decision for taxpayers subject to the higher CGT rate.
Indeed, in a case dated 20 October 2014 (CE 20 October 2014, No 367234) the Conseil d'Etat confirmed that the difference of CGT rates between EU and EEA residents and other residents constitutes a restriction on the freedom of movement of capital, contrary to EU law.
Although in this decision, the French property was owned by a French SCI, we believe it should apply to any other situations (e.g. when the property is owned directly or through a Monegasque SCI).
In substance, the Conseil d'Etat confirmed that the difference of CGT rates is contrary to EU law and that the standstill clause of Article 64 (previously Article 57) of the current EU Treaty cannot be invoked to justify the restriction.
This decision should be followed by other cases confirming the restriction in other situations, such as direct ownership.
However, we believe that taxpayers should not wait for future developments to take action. The deadlines mentioned above in respect of the social contributions apply in the same way here. Therefore, in order to claim back any overpaid tax in 2012 and 2013, a claim to the French tax authorities should be made before the end of this year.