Owning substantial property in France and liability to French taxes.

According to the French tax code, a person is considered tax resident in France if any of the following apply:

• They have their principal residence in France;
  
• They carry on a professional activity in France, whether salaried or not, unless they can justify that the activity is carried on in France on an ancillary basis;
  
• The centre of their economic interests is in France.

In a recent court case, a Belgian couple who owned property in France, and who received dividend income and undisclosed income from a company based in France, were subject to a tax investigation.

The French tax authority concluded that the tax residence of the couple was in France and not in Belgium as they claimed, as a result of which they were charged additional income tax and social security contributions for two years in respect of their French sourced income.

The couple appealed the decision of the tax authority in the French courts, with hearings at the local tribunal and the court of appeal. Although these hearings resulted in some reduction in the level of their tax liability, the rulings did not change their tax residency status.

According to the appeal court, although the couple's home and business were not located in France, they nevertheless possessed the centre of their economic interests in France with regard to the real estate they owned, stating:

«La circonstance qu’ils se soient domiciliés en Belgique et y aient payé leurs impôts n’est pas de nature à établir qu’ils soient résidents fiscaux en Belgique.»

In the view of the judges, in so far as the couple did not establish that they had assets outside France in excess of their French assets, or that they had income in Belgium or Spain in excess of their French source income, the administration was entitled to argue that the centre of their economic interests was in France.

Under the terms tax treaty between France and Belgium: "An individual shall be deemed to be resident in the Contracting State in which he has a permanent abode. / a. Where an individual has a permanent home available to him in each of the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer, that is to say, of the Contracting State in which he has the centre of his vital interests (...)".

The couple appealed to the Conseil d’Etat, the supreme administrative court in France, which censured the appeal court ruling.

The court pointed out that in order to judge that the couple had the centre of their economic interests and, consequently, their tax domicile in France, the court relied on the fact that they owned real estate in France:

"By confining itself to this finding, without considering whether these assets were income-producing, when the persons concerned argued that they received the majority of their income from their professional activities in Belgium and that their income from French sources was only exceptional in one year and non-existent the following year, the court erred in law.»

In addition, by merely stating that the couple had several permanent homes, particularly in Belgium and France, whereas the taxpayers had argued that their real estate in France could not be analysed as such, the court gave insufficient reasons for its decision.