Tax breaks for investment properties in France have been judged ‘discriminatory’ by the European Commission.

The Commission has formally requested France to amend provisions which allow investments in new residential property situated in France to benefit from accelerated depreciation, but do not allow the same for similar investments abroad.

The Commission considers such provisions to be incompatible with the free movement of capital, a fundamental principle of the EU’s Single Market.

The request takes the form of a ‘Reasoned Opinion’, which is the second step of an infringement procedure.

In the absence of a satisfactory response within two months, the Commission may refer France to the European Court of Justice.

The problem for the Commission is that the tax regimes to which they refer - ‘Périssol’, ’Robien’ et ‘Borloo’ - are no longer available, and only those who invested in them up to 2009 still retain the favorable tax treatment. It does not seem from the ruling that the tax breaks currently available to existing investors will be removed.

These tax regimes allow accelerated depreciation to be applied to new residential property in France which is intended for letting for a minimum of 9 years. The depreciation figure is then used to offset liability to income tax.

By contrast, the Commission says that a French taxpayer who invests in residential property to let in another Member State or an EEA country cannot benefit from accelerated depreciation, and hence cannot enjoy these tax benefits.

Such provisions are incompatible with the free movement of capital, as they dissuade resident taxpayers from investing in immovable property situated abroad.

Scellier

It is noteworthy that the letter from the Commission did not mention the most recent of these schemes known as ‘Scellier’. This is possibly because it operates in a slightly different manner, but more probably because that is has only been in existence since 2009, and was not part of the investigation.

Unlike the previous tax regimes, under 'Scellier' there is no accelerated depreciation, merely a direct reduction in income tax.

The ruling by the Commission does seem a little odd, particularly when there is no uniform system of taxation in the EU.

The comparatively large new build housing programme each year (circa 350,000 in France compared to 125,000 in the UK) is due in no small measure to the fiscal incentives available under these schemes.

Indeed, a number of developers have probably been saved from bankruptcy this year due to the appetite of the French for 'Scellier' properties. Two-thirds of new build sales last year were of this investment product.

Nevertheless, the schemes have come in for some criticism, primarily because they have encouraged development where there is insufficient demand, resulting in poor returns for the investors. Some critics consider the schemes have also contributed to stoking the increase in house prices.

As a result of these criticisms the government have reduced the areas of the country where they are available, and the amount of the tax relief has also been reduced.