TAXATION IN FRANCE OF CAPITAL GAINS ON THE SALE BY NON-RESIDENTS OF REAL PROPERTY SITUATED IN FRANCE
13th October 2015
When the sale of real estate in France generates a capital gain, a non-resident seller pays both income tax and social charges (Prélèvements sociaux) on this gain.
Although the taxation rules for these capital gains used to be pretty straightforward, a lot has changed over the past 4-5 years with legislative changes and court decisions; both at the national and European levels, changing the rules of the game in a substantial way.
Until very recently, a non-resident seller had to pay income tax on the capital gain from the sale of property in France at a rate that varied depending on their country of residence. Residents of a country member of the European Economic Area (which includes all 28 countries in the EU + Norway, Iceland and Liechtenstein) paid a 19% flat rate on the capital gain, whereas residents of non-EEA countries paid a 33.33 % flat rate.
In October 2014, the highest Court in charge of administrative and fiscal matters in France, the Conseil d’Etat, issued a decision in a case involving the sale of real property in France by a Swiss resident (a non-EEA resident) in which it considered that applying a different tax rate on the basis of the seller’s country of residence is contrary to EU law, namely the principle of free movement of capital that is guaranteed by article 63 of the TFEU.
Although in this particular case, the property was indirectly owned and sold through the intermediary of an SCI, the findings in this court decision can be extended, from a tax perspective, to individuals who own real estate directly.
Following the Conseil d’Etat’s decision, the law was changed accordingly a few months later to put French law in conformity with EU law.
Consequently, all sales of real property located in France by non-residents after January 1st 2015, are subject to capital gain taxation at a unique rate of 19% regardless of the country of which the seller is a resident.
Social charges also underwent substantial change over the past three years.
The rule used to be very simple: No social charges were due on the capital gain from the sale of real property located in France by a non-resident. The rationale made sense: since non-residents live abroad and pay social charges abroad, they should not have to pay social charges in France too. Conversely, sellers who were French residents were subject to social charges on such capital gains.
Always out for ways of bringing in more money, the French government decided in 2012 to subject non-residents to the same social charges as non-residents, both on real estate capital gains and real estate income.
By forcing non-residents to pay social charges on capital gains, French law now created a situation of double taxation since these non-residents often already paid social charges in their country of residence. For this reason, this tax reform was challenged in 2013 at the European level before the European Commission which subsequently launched an infringement procedure against France (EU Pilot 2013/4168).
The same year, the Conseil d’Etat requested a preliminary ruling from the European Court of Justice (ECJ) in a similar matter about EU residents being subject to multiple social charges in different EU countries. The European Commission suspended its infringement procedure, awaiting the ECJ’s decision.
On February 26th 2015, the ECJ handed down a decision prohibiting non-residents from being subject to social charges in France if they are already paying social charges in their country of residence.
In April and July 2015, the Conseil d’Etat followed on the tracks of the ECJ’s decision, but left some doubt as to whether non-EU residents would be treated differently than EU residents.
France has basically gone full circle now since it is forced to revert to its pre-2012 basic rule: non-residents do not pay social charges in France.
Reimbursement for overpaid income tax or social charges
All this shake-up has resulted in some non-residents paying more taxes than they should have on the sale of their French real property.
Non-residents who paid income tax at a rate of 33.33 % instead 19% are entitled to ask for a reimbursement from the French tax authorities for the difference in amounts.
Also, non-residents who paid social charges are entitled to reimbursement for the entire amount.
This is done by way of a “réclamation” addressed to the French tax authorities in which taxpayer requests reimbursement and explains why.
Usually the deadline for filing a réclamation is the 31st of December of the second year following the year or payment.
However, there is some discussion about whether the French Fisc will try to apply a shorter deadline for filing this claim. In that case, taxpayers would have until the 31st of December of the year following the year during which the capital gain income tax or social charges were paid (article R 196-1 of Livre des Procédures Fiscales).
This shorter deadline could catch many taxpayers off-guard, barring them from claiming money that was overpaid to the tax authorities. It has been unsuccessfully challenged before various administrative courts in Paris and Versailles, which have consistently upheld it (CAA Versailles 12 mars 2015 n°12VE02080, CAA Paris 9 décembre 1997 n°95PA03981, TA Paris 16 octobre 2013 n°1218875 and n°1218924).