Capital gains realised by non-French tax residents: the principle of non-discrimination also applies to lessors of furnished accommodation

05 May 2015

Since 1 January 2015, the tax rate applicable to capital gains realised on real estate assets by persons who for tax purposes are non-residents of the European Union or the European Economic Area, has been reduced from 33.33% to 19% (article 60 of the second Amending Finance Law for 2014).

This alignment on the rate applicable to tax residents of the EU (and EEA) is the result of the prohibition on taxing non-residents more heavily that national residents. This prohibition is based upon the principle of non-discrimination, as confirmed by the Conseil d'Etat on 20 October 2014, a judgment that was in turn based upon the principle of free movement of capital under article 63 of the Treaty on the functioning of the EU.

This principle has once again been upheld by the Administrative Court of Appeal of Marseille in its decision of 21 April 2015 (No. 13MA004737), which stated that this alone represented sufficient grounds, without the need to examine the claim (also raised by the taxpayer), based on the free movement of capital.

The case in question concerned the disposal in 2008 of a rented furnished property on the Côte d'Azur by a SNC (general partnership). As the partners in the SNC were not resident in France for tax purposes, the capital gain was taxed at a rate of one third pursuant to article 244 bis A of the French Tax Code.

Subsequently one of the partners, a Swiss tax resident, challenged the tax charge of one third, claiming not merely a reduction to 19% but total exemption. As a partner in the SNC renting the furnished property, the partner was a professional lessor of furnished premises and the rental activity had been conducted under the regime exempting capital gains pursuant to article 151 septies of the French Tax Code.

This meant that, if the partner had been a French tax resident, his share of the capital gain realised by the SNC would have been totally exempt (this regime applied at that time, before the introduction of the regime governing non-professional landlords of furnished premises).

This argument was accepted by the court, which ruled that the application of tax at a rate of one third was contrary to the provisions of the tax treaty between the France and Switzerland, which provides for equality of treatment between the tax residents of the two countries.

It should be noted that the requirements for qualification as a professional lessor of furnished premises, and thus for the application of the regime exempting capital gains pursuant to article 151 septies of the French Tax Code, are nowadays more restrictive than at the time of the case in point, as the activity must now represent over 50% of the professional income of the taxpayer.

However, this decision is interesting for two reasons, as a similar solution should apply to:

  • other tax exemption or reduction regimes that were previously in practice reserved to French tax residents;
  • tax residents of countries other than Switzerland, pursuant to Community law (the principle of free movement of capital under article 63 of the Treaty on the functioning of the European Union).

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