The legal advisor to the European Court has recommended that they should find against France over social charges imposed on those not in the social security system.

As regular readers of the Newsletter will be aware, last year the European Commission started infringement proceedings against France over the imposition of social charges on the rental income and capital gains of non-residents.

The European Commission consider that the social charges have a sufficient link with the social security system such they infringe European Regulations, which states that an EEA resident should only be subject to the social security legislation of one Member State.

In addition, as other opponents of the charges have argued, as non-residents are unable to benefit from a right to deduct part of the social charges from their income tax bill, in the same manner as those who are resident in France, then the charges are discriminatory.

All of which means that the taxes may also be contrary to agreements France has in place with countries outside of the EEA, whose residents face a bill for social charges on property income and capital gains from France.

Rental property income has been liable to these charges since 1st January 2012 and capital gains since 17th August 2012.

The rate of the charges on such income is 15.5%, made up of a number of different taxes, collectively called the prélèvements sociaux.

Last year matters took a twist when France’s highest administrative court, the Conseil d’État, threw out a claim by a Dutch national living in France, but employed in the Netherlands, that they should not pay social charges on a foreign life annuity on which they had paid social security contributions in their home country.

However, they referred to the ECJ for a general ruling on the liability of certain unearned foreign income of residents to social charges.

The European Commission are awaiting the outcome of this case in order to determine their next response concerning the imposition of social charges on non-residents.

In considering the case the Conseil d'État accepted that a European Regulation dating from 1971 prevented the imposition on social charges on salaried or business income, where these were already subject to imposition in another Member State.

What remained unclear to the court was whether unearned income (revenus du patrimoine) was within the ambit of these regulations. Under French law, 'revenus du patrimoine' includes capital gains on dividends and property.

The dispute now appears to be drawing to a conclusion, with a reasoned opinion on the referral from France delivered to the European Court of Justice (ECJ) by their legal advisor, the Advocat General (AG).

The role of the AG is to provide the court with independent legal advice upon which the ECJ can then make their judgement. Although their opinion is merely advisory, in the vast majority of cases it is accepted.

In the opinion delivered to the ECJ last month, prior to a hearing taking place, the AG stated that social charges were part of the social security system and that, accordingly, they could not be imposed on income of those subject to the social security system of another Member State.

In coming to his opinion the AG stated that to classify a social security contribution as a tax would jeopardise the coordination of social security systems within Europe, the principle objective of the relevant regulation.

In addition, the fact that payment of the social charges does not give the payer entitlement to any direct benefit, the AG considered immaterial when assessing whether those contributions have a direct and sufficiently relevant link with the legislation governing social security.

The AG also took the view that to impose these charges on unearned income would constitute a threat to the free movement of workers, a governing principle of the European Union.

The requirement to contribute to two social security systems, when all other residents are only required to contribute to one system, also constituted unequal treatment, and was therefore discriminatory.

The AG therefore concludes:

"I suggest that the Court should rule as follows in answer to the question raised by the Conseil d’État:

Contributions on income from assets such as the general social contribution on income from assets (CSG), the social debt repayment contribution (CRDS), the social levy of 2% and the additional contribution to that levy in issue in the main proceedings have a direct and sufficiently relevant link with the French legislation governing the branches of social security listed in Article 4 of Regulation (EEC) No 1408/71 of the Council of 14 June 1971 on the application of social security schemes to employed persons, to self-employed persons and to members of their families moving within the Community, as amended. They thus fall within the substantive scope of that regulation."

If the ECJ were to accept this opinion, by extension it would mean that social charges on the rental income and capital gains on non-residents would be illegal under European law.

No hearing date for this case has yet been set, but it is anticipated to take place within the next few months.

Claiming a Refund

If the ECJ do find against France the question arises of just how the French government will react. It cannot be assumed the judgement will be applied retrospectively by the French government.

We are aware the government have established a parliamentary working party to consider the implications of such a decision and Christian Eckert, the Secretary of State for the Budget, has stated that he wishes to find a solution.

Nevertheless, in order to obtain a refund of overpaid taxes it will almost certainly be necessary to submit a claim to the French tax authority, and to also possibly follow up this claim to a French court if it is not accepted.

A claim for refund of overpaid taxes must be made within time limits specified in French law.

As a general rule up to two years following imposition is permitted.