Social contributions may no longer apply to non French-tax residents. Our French tax experts take a closer look.
Since 2012 social contributions have applied at a rate of 15.5% on French rental income earned as of 1 January 2012 and on 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.
In a case dated 26 February 2015, 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 Regulation N°1408/71, Article 13 of which provides that the people to whom the Regulation applies shall be subject to the legislation of a single Member State only.
The article therefore established the prohibition against overlapping legislation.
The CJEU's decision was recently confirmed by the French Supreme Court ("Conseil d'Etat") on 27 July 2015.
This confirms that France cannot require people who are already subject to social contributions in their State of residence or in the State in which they carry out a professional activity to pay extra social contributions in France.
Therefore, non-French tax residents, who are not in principle subject to the French social legislation, should not have to pay these social contributions in France on income derived from property they might own in France.
The French tax authorities have recently said that they have taken the Supreme Court's decision into account and will provide written guidance on how this decision should be interpreted and how and to what extent claims should be made.
The CJEU and Supreme Court's decisions should primarily affect EU, European Economic Area (EEA) and Swiss residents. Residents of third party countries should also benefit from these decisions but on a different ground.
EU, EEA and Swiss residents
Provided that they are affiliated to a mandatory social security regime in their country of residence, these residents can make a claim to the French tax authorities to be reimbursed for any social contributions paid in France in the past on rental income or capital gains made on the sale of a French property. In respect of years 2013 and 2014 actions should be taken by 31 December 2015.
This might also affect French tax residents who are not affiliated to the mandatory French social security system because they work in another country for instance. Even if they are French tax residents they should not pay social contributions in France. This was the case of Mr Gérard de Ruyter in the CJEU's decision: He was a Dutch national who had his tax residence in France but worked in The Netherlands and was affiliated to the Dutch social security system.
Residents of third party states
Residents of states other than members of the EU, the EEA and Switzerland should also benefit from these decisions provided that they can prove that they are affiliated to a mandatory social security regime in their state of residence.
If they are not affiliated to another social security regime, France should still be able to require social contributions to be paid on income derived from property because it would not violate the principle according to which a person should be subject to the social security legislation of a single State only.
In respect of third party state residents, we believe that there are two means by which they may benefit from these decisions, as they cannot directly rely on Regulation N°1408/71.
Firstly, France has signed many international social security agreements which prohibit the application of overlapping legislation. Depending on the State of residence of the taxpayer, these agreements should be taken into account when making a claim.
Secondly, we believe that the EU law principle of freedom of movement of capital could also be relied upon. If EU-residents are subject to more favourable tax treatment than others, this could constitute a restriction on the freedom of movement of capital, and therefore be contrary to EU law. Non-EU residents would be able to benefit from this.
The French government has already announced that it is expected to reform the laws relating to social contributions owed by non-residents on their French property income. The recent decisions might announce the end of the social contributions applicable to non-French tax residents but not necessarily the taxation.
We will send out another legal alert to keep you updated on future developments as soon as we receive any further information on this issue.