An Update on the Illegal application of French social charges to non-residents
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Individuals who have been in receipt of French rental income or have made capital gains on their French property may be in position to claim refunds from the French authorities.
Since 2012, France has attempted to apply social security charges (the equivalent to UK national insurance contributions) to rental income from French real estate and capital gains on the disposal of French properties. The original position was already judged illegal by the European Court of Justice leading to tens of millions of Euros being refunded by the French state. Their amended position has also now been judged illegal in local courts and legislation has now been introduced to alter the position significantly.
The French administrative tribunal, and now an administrative appeal tribunal, have held that the social charges regime, as applied since 1 January 2015 to rental income and since 1 January 2016 to capital gains, is illegal.
It is likely that the French authorities will appeal this decision to the French Supreme Court and the matter may again be referred to the European Court of Justice.
In the event that this decision is maintained, individuals who have received rental income or made capital gains in this period should be in a position to claim a refund from the French authorities (plus interest). This is likely to follow the same process as the refunds relating to the pre-2016 legislation. Broadly if you can demonstrate that you pay social security in another EU country at the relevant time, you will be entitled to a refund.
Due to strict limitation periods in France it may be worth filing a protective claim now.
The 2019 French Finance Law makes a significant change to the way in which this regime operates.
From 1 January 2019, individuals who are within the scope of another EU social security regime will not pay the full social charge amount in France. Their charge will be limited to 7.5% on rental income or capital gains (in addition to the usual income tax or capital gains tax rates).
This means that individuals who pay social security in another EU country should see their effective tax rate in France lower compared to when social charges were applied. Individuals not within such a regime will face the same level of charge as before.
Position for UK residents
For the most part, individuals in the UK will be within the UK national insurance regime. This means that they should be entitled to refunds for social charges paid up to now.
Under the new law and depending on the eventual outcome of Brexit negotiations, individuals will be treated as not within another EU social security regime. As a result, the social charges are likely to continue to apply.
The legality of this position is also likely to be challenged before the French tribunals. It will also be necessary to consider the terms of any social security agreement which is eventually negotiated between the UK and EU.