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Profits on real estate & taxation of non French residents

 25 October 2018

Profits on real estate & taxation of non French tax residents...   

Government complies with court rulings! 

 During questioning of the Government on 16 October 2018, Mr Gérald Darmanin, Minister of Public Action and Accounts, announced a number of reforms concerning the taxation of non French tax residents on their French real estate assets.

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 ♦ Elimination of the application of social security charges (15.5% or 17.2% since 2018) to income and capital gains arising from real estate realised by non French tax residents.

 ♦ Extension to non French tax residents of the tax exemption of capital gains realised on disposals of their main residence in France.

  Elimination of the application of social security charges to income and capital gains arising from real estate realised by non French tax residents   

Reminder 

The application of social security charges (CSG, CRDS, etc.) to income and capital gains arising from disposals of real estate realised by non French tax residents has already seen the following changes:

 ♦ 2012: Introduction of social security charges to be applied to income and capital gains realised by French non-residents1.

 ♦ 2015: Application of social security charges to income arising from assets of persons affiliated to a social security scheme in another member state of the European Union (or the European Economic Area, or Switzerland) is held to be contrary to Regulation 1408/712, with the exception of the 2% solidarity charge.

 ♦ 2016: Upholding by the Government of the application of social security charges to income and capital gains arising from the real estate of non French tax residents through a new allocation of the funds derived from these charges3.

 ♦ 2017: Ruling by the Tribunal Administratif of Strasbourg stating that the application of social security charges is, despite the 2016 reform, contrary to Community law. This decision was confirmed by the Cour d’Appel Administrative of Nancy on 31 May 2018 (17NC02124), with the exception of a portion of the social security charges and its additional contribution, for which a preliminary question has been submitted to the CJEU.

 ♦ 16 October 2018: Gérald Damarnin announces the reintroduction of the exemption from social security charges of income arising from capital realised by non French tax residents!

 This measure is to take form of an amendment to the draft Finance Law for 2019 or to Social Security Financing Law for 2019!

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It remains to be seen whether this will apply to all social security charges (some minority charges have been validated by court rulings) and to all non French tax residents (or only to those affiliated to social security schemes of other EU or EEA member states or Switzerland).

  • Will there be a favourable outcome for ongoing litigation? The tax authorities would have to accept taxpayer claims (except for some minority charges), as advocated by Anne Genetet, the deputy behind the global reform of the tax regime governing non French tax residents.
  • As regards taxes paid since 2016, do not forget to claim before the final deadline (claims are possible before 1 January 2019 for income on real estate received in 2015 and disposals made in 2016). 


Capital gains realised on disposals of their main residence by non French tax residents will be exempt under certain conditions

Article 150 U-II-1 of the French Tax Code (FTC) exempts capital gains realised on disposals of the seller’s main residence when made by a French person who is resident for tax purposes.

However, at present, the provisions of the FTC governing non French tax residents have led to this exemption being refused to taxpayers who, having left France, have become non-residents of France on the day of disposal of the main residence that they occupied while still resident in France.

While this situation was originally upheld by the French Conseil Constitutionnel, the Tribunal Administratif of Versailles has recently ruled that it is contrary to the Community principle of free movement of capital.

Although the time limit for appealing against this decision has not yet expired, it should be noted that the tax authorities have seen that the current legislative regime, which exempts capital gains realised on disposals of main residences, does not comply with Community law. 

DRAFT FINANCE LAW FOR 2019

As part of the discussions on the draft Finance Law for 2019, the Government has tabled an amendment (no. I-2567) extending the exemption for main residences to non French tax residents, under the following conditions:

 ♦ The property was the main residence in France of the seller on the date of the change of tax residence to a location outside France.

 ♦ The property was not made available to a third party, whether or not for valuable consideration, between the date of the change of tax residence to a location outside France and the date of disposal.

 ♦ The seller has become a tax resident of a European Union member state or a state that has concluded with France both an administrative assistance agreement and a mutual tax recovery assistance agreement, and that is not a non-cooperative state.

 ♦ The disposal occurs no later than 31 December of the year following the seller’s change of tax residence to a location outside France.

 The deadline (31 December of the year following the change of tax residence) is a transposition of the “normal period for disposal” permitted to French tax residents who dispose of their residence after moving to another residence in France. However, while such persons are allowed a longer period in the event of difficulty with the disposal (e.g. the particular nature of the asset with regard to the local market), this tolerance has not been transposed into the new draft as regards non French tax residents.

This may therefore be a new cause for litigation.

In any case, it will be necessary to gather all the evidence for the date of change of tax residence to locations outside France (removal bills, air tickets for the taxpayer and family, proof of occupancy of new residence outside France, etc.).

Similarly, the condition requiring the existence of a recovery assistance agreement may also give rise to discussion, as such agreements do not exist for every state with which France has a tax treaty.

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♦ The new provision would apply to disposals made on or after 1 January 2019.
♦ For disposals made prior to this date, claims should be made for the tax charged on condition that the disposal met the deadline condition (disposal made after 31 December 2015 except for special cases).
♦ 31 December 2018: deadline for claims relating to disposals made in 2016.

  

From Pierre Appremont & Samuel Drouin 

1. Article 29 of the Amended Finance Law for 2012. 
2. Decisions of the Court of Justice of the European Union of 27 July 2015, case C‑623/13 de Ruyter, and of the French Conseil d’Etat of 27 July 2015 n° 334551 & 342944). 
3. Article 24 of the Social Security Financing Law for 2016.

 

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