The French government have been obliged to alter the calculation of capital gains on the sale of shares, following a ruling by the French Supreme Court.

Since 2013 capital gains made on the sale of shares in France have been taxed as part of the personal income tax system, on a progressive basis according to the marginal rate of tax that applies to your household.

Tax relief is granted on the gain for the number of years the shares have been held at the rate of:

• 50% for shares held between 2 years and less than 8 years;
• 65% if held at least 8 years.

There is no relief for duration of ownership granted against the social charges (prélèvements sociaux), which are charged at the rate of 15.5%.

In determining the overall taxable gain it is possible to offset the losses made on shares sales against the gains.

However, the administrative doctrine applied by the tax authority has been that the relief granted for years of ownership applies as much to the losses as the gains.

This has meant that the level of the losses that could be set off against the gains was reduced by duration of ownership.

That is to say, assuming a loss of €10,000 in the year on some shares held for 5 years, the taxable loss is reduced by 50%, meaning that only €5,000 could be offset against gains in the year, resulting in a higher tax imposition!

Critics argued that, far from encouraging investors to hold on to shares, this tax treatment forced them to sell shares that had fallen as soon as possible, so as not to incur a penalty for duration of ownership.

This tax treatment of losses was recently ruled illegal by the Conseil d'Etat, the French Supreme Court, who took the view that the interpretation of the legislation being applied amounted to abuse of power by tax officials, stating that, "ne se borne pas à expliciter la loi mais y ajoute des dispositions nouvelles qu’aucun texte ne l’autorise à édicter."

Accordingly, they ruled that only 'net' gains were taxable, an approach that takes into account the relief allowed on gains for duration of ownership, as well as any actual loss incurred in the year.

As a result of this ruling the regulations have now been changed and those who have been adversely affected by it in 2013 and 2014 are entitled to make a claim for a tax refund, including a refund of overpaid social charges.