A European Court ruling will result in France reimbursing millions of euros to foreigners overtaxed on real estate sales and rentals

Since August 2012, non-residents who sell a property in France, or derive income from property rentals, have had to pay social charges totaling 15.5% on the net capital gain or the income. A recent judgment by the European Court of Justice (ECJ) has overturned this rule.

The ECJ stated that social charges are used to fund the French social security system. But people who already belong to the social security system in another European Union (EU) country are unable to benefit from the French system. They should not, therefore, be liable to pay French social charges.

The ECJ’s judgment resulted from a test case brought by a Dutch individual who actually lived in France but worked in Holland. He paid Dutch social charges and belonged to the Dutch social security system. But the French tax authorities required him to pay French social charges on Dutch life annuities.

The ECJ ruled that he could not contribute to the social security systems of two different EU countries at the same time. The French imposition of social charges was, therefore, unlawful.

Legal experts say that the ECJ’s decision applies to non-residents of France who reside in and contribute to the social security system of another EU country.

For now, people who reside outside the EU are still liable for social charges on capital gains or rental income from their French property. However, a recent precedent exists for harmonizing the rate of taxation for all non-residents. Until this year, non-residents living in a country outside the European Economic Area (EEA) paid 33.33% or more in tax on capital gains from the sale of a second home in France, depending on their country of residence. In contrast, EEA residents paid 19%.

The French Conseil d’état, the supreme administrative court, decreed that this did not conform to EU law. Consequently, the French government changed the law as of January 1^st 2015 so that all non-residents now pay capital gains tax of 19%. It is possible that the Conseil d’état may make a similar ruling with regard to social charges.

The introduction of social charges in 2012 was intended to raise around €250 million per year. The ECJ’s judgment will oblige the French government to reimburse the sums non-residents have overpaid in social charges since 2013.

The French Conseil d’état must rule on these amendments before they can be applied. The French tax authorities must then issue documentation confirming the ruling. In the interim, capital gains on the sale of secondary residences will still be subject to social charges in addition to capital gains tax.

Once the amendments are in place, under French tax law claims for reimbursement must be filed by December 31st of the second year following the year in which the social charges were paid. So it is still possible to claim a refund for 2013 but not for 2012, since the deadline has already passed.

The ECJ’s ruling is good news for EU nationals who own a second residence in France. We will keep you updated on any changes to the law regarding social charges that may affect non-residents living in a country outside the EU.

 Photo Credit – Adrien Scow