A French court confirms that the imposition of social charges on those not in the French social security system is illegal, opening the way for thousands of tax refunds to be made.

Regular readers of our Newsletter will be aware of a case considered by the European Court of Justice last February, when the court ruled that a migrant worker who was resident in France, but subject to the social security system of the Netherlands, should not be liable for French social charges on investment income he obtained from his home country.

The case had been referred to the European Court of Justice by the French Supreme Administrative Court, the Conseil d'Etat, for them to adjudicate on whether social charges (prélèvements sociaux/contributions sociales) were part of the social security system or a more general tax.

If the former, then under European legislation they were unlawful, as individuals in Europe can only be subject to social security charges in one country.

The European Court made a judgement in favour of the Mr de Ruyter, the Dutch national concerned, as a result of which the case was referred back to the French Conseil d'Etat, in order that the ruling could be applied in France.

The French court have now followed the line handed down by the ECJ by ruling that Mr de Ruyter should be granted a full refund of social charges paid, together with interest payable.

Not only will Mr Ruyter receive a full refund, but also interest on the sum. The rate of interest is 0.4% a month (4.8% pa) calculated between the time the tax was paid and the date of the refund.

Does the Ruling Apply to Non-Europeans?

One major question arising from this ruling is whether the exemption from social charges that applies to EEA residents also applies to those from outside of Europe.

If so, then social charges could no longer be applied on their income and gains from France, and they would also be entitled to a refund of taxes previously paid, on the same basis as European residents.

On this point we have sought a legal opinion from a specialist tax lawyer in France, who commented as follows:

"In principle, all non-residents are entitled to make a claim for a refund, subject to complying with the conditions of validity of such a claim, notably that they elect for French domicile (a technicality that can be accomplished by using a friend or a professional advisor in France).

It would be reasonable to think that the criteria that established the cancellation of social security contributions for European residents can easily be transposed to residents outside Europe (professional activity abroad and the benefit of a foreign social protection scheme).

Indeed, it is not acceptable that non-residents living outside the European Union are assessed using a different regime from those residing within the European Union while they have social protection in an identical situation.

The principle of alignment of capital gains tax rates for Europeans and non-Europeans was carried out in the Loi de Finance Rectificative 2014, which harmonised the rate at 19% (plus social charges) for everyone, irrespective of their country of residence.

But at this stage we should remain cautious and the outcome of such a claim cannot be guaranteed".

That caution is probably well founded, for in a letter last month to Frédéric Lefebvre, the Deputy in the National Assembly representing French citizens in North America, the government indicated that if the Conseil d'Etat confirmed the ECJ judgement they intended to treat differently Europeans and Non-Europeans.

It may well be, however, that they will eventually be obliged to concede parity of treatment, in the same manner as occurred over capital gains tax in 2014, following a decision in the French courts.

Does the Ruling Apply to Residents?

It is noteworthy that this case concerned an individual who was resident in France, but subject to the social security system of another country.

That being the case, it begs the question of whether the judgement is relevant to all those in similar circumstances.

Those most likely to be interested would be retired EEA expatriates in France who obtain their health cover through an S1 certificate of exemption, meaning that they are technically not in the French social security system for their health cover. They obtain exemption on their pension income, but not on investment or rental income.

Others who might be interested in the judgement are those who are resident in France and who are privately insured for their health cover. This, for instance, might include early retirees who have been unable to obtain access to the French health system.

Those who are salaried employees or self-employed persons in France who pay social security contributions in another country of Europe as well as France may also feel they have a claim for a refund of social charges.

In relation to such persons it is interesting to note that a former Director of the non-resident tax service in France has publicly stated that anyone living in France not affiliated to the French social security system, but paying social charges on their income or capital gains, should make a claim for a refund of charges, albeit that their claims may only be finally resolved through litigation.

Claudine Schmid, a Deputy in the National Assembly, has tabled a parliamentary question asking: "Si le Gouvernement, s’agissant des contribuables concernés, s’en tiendra aux contribuables assujettis aux contributions sociales d’un autre État membre de l’UE et de la Suisse ou à l’ensemble des contribuables non assujettis à la Sécurité sociale française." A response is awaited and we will provide an update in due course.

Claims and Refunds

At this stage there has been no public comment from the French government about what they will now do, although prior to the Conseil d'Etat ruling they stated: "C’est après cette décision que le Gouvernement sera, le cas échéant, amené à prendre les dispositions éventuellement nécessaires."

The expectation, therefore, is that the government will now have to change primary legislation on this matter, which they are likely to do later this year, as part of the annual budgetary process.

In effect, the government will need to annul the relevant clause in the Loi de Finances Rectificative 2012, which imposed social charges on the French rental income and capital gains of non-residents.

In the meantime, tax offices and notaires are continuing to apply the charges.

In relation to refunds, last year Christine Eckert, the Secretary of State for the Budget stated that, "Toutes les réclamations seront traitées, personne ne sera privé de son droit."

In anticipation of having to make reimbursements to tens of thousands of potential claimants, the government set aside a contingency provision of €500 million, spread over two years - €100m in 2015 and €400m in 2016.

However, French law does not provide for the automatic refund of taxes to those who may be in similar circumstances to a successful litigant.

A refund is only made by making a tax claim, for which time limits apply.

Those who paid social charges on their rental income in 2012 and those who sold a property in France in 2014 have until 31st December 2015 to make a claim. For those who sold in 2013, the legal position is less clear, although a claim should be possible due to non-conformity of the law.

Those with rental income and capital gains since these dates have longer to apply.