The European Court has ruled that social charges on the income and capital gains of non-residents from within the EEA is illegal, opening the way for claims by those who have paid such charges.

The decision of the court is based on an interpetation of European Regulation 1408/71, regarding the coordination of social security systems within the EEA.

It states that persons can only be subject to one social security system and thereby only pay social contributions in one Member State. France has always argued that the social charges were part of the more general system of taxation, a view that has not been accepted by the ECJ.

In their judgement the ECJ stated that:

"Regulation No 1408/71 must be interpreted as meaning that levies on income from assets, such as those at issue in the main proceedings, have, when they contribute to the financing of compulsory social security schemes, a direct and relevant link with some of the branches of social security listed in Article 4 of that regulation and thus fall within the scope of the regulation, even though those levies are imposed on the income from assets of taxable persons, irrespective of the pursuit by them of any professional activity. "

In coming to their decision the court drew attention to a decision it made in 2000, when it declared illegal the imposition of social charges on the employment income of employed and self-employed persons residing in France who were subject to the tax regime in France, but who worked in another Member State.

So the court stated that:

"The same conclusion must follow with regard to the levies at issue in the main proceedings, which are not imposed on the employment income and substitute income of workers, but which are imposed on income from assets, since it is not in dispute that the proceeds of those levies are allocated specifically and directly to the financing of certain branches of social security in France or to the discharge of their debts."

The ruling applies to all investment income earned in France, notably rental income, as well as capital gains that arise in 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.

In the opinion delivered to the ECJ last month, prior to a hearing taking place, the legal advisor to the ECJ 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.

Claiming a Refund

The question that now arises is just what the French government will do? The issue was referred to the ECJ by the French Supreme Court, the Conseil d’État, when they 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. On that basis, having now got the judgement from the ECJ, the Conseil d’État is likely to sit and rule that such charges much now be abolished for non-residents from within the EEA. This process is necessary as it is for Member States to bring into force European law, whether as Directives, Regulations or decisions of the ECJ.

We are also 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, it is highly unlikely there will be any automatic retrospect refund, so 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. The deadline to appeal in respect of the charges paid in 2014 is 31 December 2015.

It remains unclear just what the French government may do about those from outside of the EEA who remain liable for the charges, but in the same manner as capital gains tax was this year made uniform for all non-residents, it is possible there could be primary legislation to do the same for social charges.