Non-residents now face social charges on the rental income and capital gains of holiday homes in France.

New Rates

The sale of holiday homes by non-residents is now subject to an additional tax charge of 15.5%, with an operative date of 17th August.

This means that the basic rate of capital gains tax on property sales for those from the European Economic Area is 34.5%, while for those outside of the EEA the basic rate is 48%.

These rates reduce on a sliding scale after 6 years of ownership, but with full exemption only possible after 30 years of ownership

The charge will apply on the rental income from unfurnished lettings, for all such income received from 1st January 2012. There remains some uncertainty about the liability of furnished lettings, and we await further guidance from the French government.

Rents from second homes will continue to be subject to a 20% rate of income tax, as well as the 15.5% social charge for lettings, giving a combined tax charge of 35.5%.

In both cases the charges are imposed on the net taxable income or capital, after deduction of eligible costs and allowances.

Legal Objections

During the progress of this matter through the French Parliament a sizeable body of members from both the National Assembly and the Senate raised objections to the proposed charge, which they considered contrary to European law.

In particular, they cited European Directives 883/204 and 1408/71 on the coordination of social security systems in the EU, as well as a landmark European Court of Justice (ECJ) judgement in February 2000, which confirmed that individuals should only be required to pay social charges in the country in which they were resident.

In their consideration of this proposed measure, this argument was not accepted by the French Constitutional Council, who stated that the payment of the social charges conferred no social security rights or benefits and did not, therefore, conflict with European regulations.

In their decision they stated that:

''que la contribution additionnelle aux prélèvements sociaux sur les revenus du patrimoine et de placement, destinée à financer le fonds national des solidarités actives, ne constitue pas davantage une cotisation ouvrant des droits aux prestations versées par ce fonds; que, par suite, les dispositions de l'article 29 sont relatives à l'assiette ou au taux d'impositions de toutes natures ; qu'elles ont donc leur place dans la loi de finances rectificative ; qu'ainsi, l'article 29 a été adopté selon une procédure qui n'est pas contraire à la Constitution.''

In fact, in coming to their judgement in February 2000 the ECJ was fully aware that the social charges conferred no direct social security benefit, as their press release at the time made clear:

"the legislation of a single Member State is to apply for the purposes of social contributions........the decisive factor for the purposes of applying the Community rules is that there must be a link between the provision in question and the social security schemes. That link appeared to the Court to be sufficiently direct and relevant as regards both the CSG and the CRDS in so far as those contributions are aimed specifically and directly at financing the French social security scheme. In the Court's view, the fact that payment of those contributions does not give entitlement to any benefit in return does not undermine that conclusion.

The Court concludes... that the contributions in question, although categorised as a fiscal charge by the French Republic, are in fact in the nature of a social levy. It points out that the fact that a worker is required to pay ...... social charges arising under the legislation of several States, although he can be an insured person only in respect of the legislation of one State, means that the worker must pay contributions twice over, contrary to the Community rules."

As if to anticipate a conflict with European laws, the French Constitutional Council stated that, whether or not a national law was in conflict with international laws and treaties was not a constitutional matter, but a matter for the courts on which to decide.

''que, si ces dispositions confèrent aux traités, dans les conditions qu'elles définissent, une autorité supérieure à celle des lois, elles ne prescrivent ni n'impliquent que le respect de ce principe doive être assuré dans le cadre du contrôle de la conformité des lois à la Constitution ; que le moyen tiré du défaut de compatibilité d'une disposition législative aux engagements internationaux et européens de la France ne saurait être regardé comme un grief d'inconstitutionnalité; que l'examen d'un tel grief fondé sur les traités ou le droit de l'Union européenne relève de la compétence des juridictions administratives et judiciaires.''

This seems an odd conclusion for the Constitutional Council to reach, for it is within the realm of its responsibilities to ensure that laws passed by the French Parliament comply with international obligations to which France is a party. Under Article 55 of the French Constitution all internal laws are subject to international treaties and laws.  Indeed, the Council have previously vetoed draft laws precisely because they did not comply with such obligations.

Only if those obligations themselves were not compatible with the French Constitution would it be in order for the Council to strike them out. As France has signed up to the Directives in question, then, on the face of it, the measure should have been declared unconstitutional.

European Commission

We have therefore spoken to the European Commission concerning these charges, who, despite being made aware of this court judgement, have stated to us that at the present time, they do not consider this measure is illegal.

Emer Traynor, spokeswoman of the European Commission stated that: "From our initial assessment, the Commission doesn't believe there to be discriminatory treatment, which would go against EU law, in the French social charge".

She continued, "French social charges are applied on a wide variety of income sources, such as investments, rental income and capital gains. They are not only levied on wages, salaries or pensions. These social charges therefore form part of the general system of taxation.

Although some French social security schemes may be financed from the public budget, their financing from general taxation is excluded as a rule. In this case, no specific proportion of the social charge is earmarked for financing health care.

The new rules require French residents and non-residents to both pay this contribution at the same rate, which is currently 15.5%. So it is only a change in the territorial scope of the tax measure, which does not go against the EU principle of non-discrimination."

It is interesting to note that the Commission have chosen to assess the legality of this law on the basis of whether or not it was 'discriminatory' as between residents and non-residents. As both paid the charge at the same rate, it was not discriminatory. By contrast, the ECJ considered social charges imposed beyond France's borders was illegal as non-residents already paid social contributions in their home country.

The Commission, however, now seem to take the view that the social charges are part of the general system of taxation, not the system of social security. This is despite the fact that the law forms part of the code de la sécurité sociale in France.

Accordingly, if the European Commission are not going to test the legality of this measure then, unless they can be persuaded to change their mind, or there is a successful legal challenge from an individual citizen, it looks like this new charge is here to stay.