A French court has judged discriminatory the imposition of a higher rate of capital gains tax on a non-resident outside of the EEA.

The rate of capital gains tax on the sale of real estate in France differs according to whether or not you are EEA resident.

For those resident in France or another country of the EEA, the basic rate of tax is currently 19%; for those from outside of the EEA the rate is 33.3%.

To both these basic rates is added the social charges at the rate of 15.5%.

However, what happens in the case of a non-resident from outside of the EEA, in a country having concluded a tax treaty with France, who owns a property in France through the auspices of a French registered Société Civile Immobilière (SCI)?

That was the question considered by the Court of Appeal earlier this year, in a case involving the sale of an SCI owned property by a couple of Swiss nationals resident in Switzerland.

In 2006, the couple sold their property in Saint-Etiennede-Saint-Geoirs, Isère, in the process paying the higher applicable rate of capital gains tax.

Believing that under European law (Article 56 on free circulation of capital) they should have been entitled to the lower rate, they sought a reimbursement of overpaid tax, which was refused by the French tax authorities.

This refusal was upheld by the local court in Grenoble, but subsequently overturned by the Court of Appeal sitting in Lyon.

For the judges sitting in Lyon, there was no legal difference between an SCI comprising non-resident shareholders or resident shareholders, as the legal body disposing of the property was a French registered company.

The French government argued that the European Treaty allowed them to apply a French law applying from 1993, which made a distinction with those who were non-resident, but the judges were of the view that as this law was amended in 2004 the ability to use this « clause de gel » under European law was not founded.

Accordingly, the judges decided that the couple should receive a reimbursement of overpaid capital gains tax.

Given the importance of this decision the French government have lodged an appeal to the Conseil d’État, the highest administrative court in France, so this may not be the final word on the matter. A suivre.