French Social Surcharges: Your clients may be entitled to further refunds
We thought that the issue of the application of the French prélèvements sociaux on investment income and capital gains was over. However, both recent French case law and French legislation have brought new hope of further refunds.
French social surcharges are applicable on French investment/rental income and on capital gains made on sales of French assets. They applied at a cumulative rate of 15.5% until 2016, increasing to 17.2% from 1st January 2017 for income and from 1st January 2018 for capital gains.
In an article posted here in July 2015, I encouraged your clients to claim a refund of the French prélèvements sociaux to which they had been subject on their French income in tax years 2013 and 2014. These claims were based on the European Court of Justice’s ruling of February 2015 (de Ruyter) which confirmed that the application of the French social surcharges to all taxpayers, irrespective of the EU State where they effectively contribute to a social security system, was against EU legislation.
This initial ruling triggered a wave of claims for refunds by those taxpayers who could show that, at the time of receipt of the French income or gain, they were paying UK national insurance and entitled to NHS care.
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The claims covered exclusively income and gains of tax years prior to 2015, as the French Government had clearly refused to give up applying prélèvements sociaux to investment income and capital gains of all individual taxpayers, irrespective of their country of Social Security contribution and affiliation. Hoping that the ECJ’s ruling would be interpreted restrictively to apply only to those social contributions financing contributory welfare funds, the French Legislator had redirected the proceeds from these surcharges to non-contributory Social Security funds, with immediate effect from 1st January 2015.
Thankfully this didn’t take into account the determination of taxpayers to further challenge this budgetary trick.
On 31st May 2018, the French Court of Appeal of Nancy further ruled in favour of a taxpayer whose French 2015 investment income had been subject to the social contributions despite his exclusive contribution to the Swiss social security and health funds, hence confirming that French amended legislation was still infringing EU Regulation 883/2004.
Despite the French Government appealing against the Court of Appeal’s ruling, the French Social Security Act 2019 makes a U-turn.
Acknowledging that French law remains non-compliant with the EU principle of unicity of contributions to one social security and insurance system only, article 26 of the Act withdraws the application of prélèvments sociaux on French investment income and capital gains of taxpayers who can prove that they are affiliated to the Social Security of another EEA country (i.e. EU countries, Norway, Iceland and Lichtenstein) or Switzerland.
The new exemption is to apply retrospectively to all investment income received since 1st January 2018. The exemption only applies to gains made on sale of French assets from 1st January 2019.
Sadly, the exemption doesn’t cover all French social surcharges, but only the CSG (Contribution Sociale Généralisée) and CRDS (Contribution pour le Remboursement de la Dette Sociale), hence leaving the Prélèvement de Solidarité still applicable at a rate of 7.5%.
Still, considering that French social contributions are specifically excluded from foreign tax credit under the France/UK double tax treaty and are not eligible for unilateral relief under UK tax rules, this rate reduction from 17.2% to 7.5% is certainly good news as it reduces the UK taxpayer’s double taxation in the same proportions.
It‘s not yet clear whether the French Government will drop its appeal against a taxpayer’s challenge before the new legislation was enacted. It would nonetheless be logical that the appeal is withdrawn in the near future, the French Government further acknowledging that its own legislation was against EU rules.
However, this positive outcome may only be short-lived for UK tax residents. The French Social Security Act clearly provides that the exemption of CSG and CRDS only applies to those taxpayers who are contributing to the Social Security, Health and welfare funds of an EEA country or Switzerland (who has signed a reciprocity treaty), hence excluding taxpayers residing in any other countries, which shall include the UK after Brexit.
Unless that UK was to remain a member State of the European Economic Area after Brexit, or sign a mutual agreement on Social Security similar to that signed by Switzerland, none of which are currently contemplated by the UK Government, it means that all French income received or French capital gains made after Brexit day will become subject again to the French social contributions at the full cumulative rate of 17.2%.
What actions should your clients consider?
- Backed up by the Court of Appeal’s decision of last year, and despite the French Government appeal not yet being withdrawn, your clients should submit a claim for refund of the French social contributions paid on their French investment/rental income received 2016 and 2017. The deadline to submit their claim expires respectively on 31st December 2019 and 31st December 2020. A claim can also be submitted for surcharges paid on gains made on the sales of French assets in 2018. The submission deadline expires on 31st December 2019.
- Regarding French income received in 2018, it is not yet clear how the exemption will effectively apply. It is anticipated that the full rate of prélèvements sociaux at 17.2% may be charged, subject to the taxpayer providing evidence of his contributions to the UK National Insurance and registration with NHS. However, the French income tax returns for 2018 may also be adapted to include a statement on trust, of affiliation of the taxpayer to another EU/EEA country’s social security system.
- Any UK tax resident currently selling a French property will want to secure a signature of the final sale deed before Brexit to benefit from the reduced rate of French social contributions at 7.5%. Of course, this may not be possible in consideration of usual delays of pre-completion searches and formalities of French conveyancing. It should nevertheless be pointed out to the French Notaire in charge of the transaction to consider all options and priorities.
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