March 6, 2015
Since 2012, France has imposed the so-called French social taxes (CSG, CRDS and prélèvement social) at a rate of 15.5% to gains and rental income derived from French real estate. A recent decision by the European Court of Justice ("ECJ") has now reversed the French government in situations where the employee is subject to the social security regime of another EU country, opening the door to refund claims for affected taxpayers.
The Ruyter Decision
On 26 February 2015, the ECJ ruled that the French social taxes are, in fact, social security contributions (the "Ruyter Decision"). According to the ECJ, the French State’s use of such taxes to provide direct financing of the French social security regime constitutes a direct and sufficiently relevant link to the French social security system.
The analysis of the ECJ is based on Regulation No 1408/71 (as amended), which prohibits overlapping social security systems. In summary, this Regulation prohibits an EU resident from being required to contribute to two different EU member States social security regimes simultaneously. According to the Ruyter Decision, this prohibition does not depend on the pursuit of a professional activity, and therefore applies to both active and passive income alike.
In the case at stake, Mr de Ruyter, as a migrant worker, was subject to the social security regime of his Member State of employment (the Netherlands). Accordingly, the ECJ held that the Regulations require that his income, whether from an employment relationship or from assets held in France, cannot be subject in the Member State of residence (France) to levies which have a "direct and sufficiently relevant link" to the social security system. Otherwise, Mr de Ruyter would be subject to unequal treatment as compared with other persons residing in France, since those persons are required to contribute only to the French social security scheme.
Impact and Consequences within the EU
As a result of the Ruyter decision, the 15.5% French social taxes that have applied since 2012 to French real estate income earned by EU individual residents should no longer apply whether the taxpayer is paying into the social security system of another EU country. Furthermore, any such taxes are refundable if paid less than two years ago. As illustrated by the situation of Mr de Ruyter, the impact of this decision is therefore very broad, as it may impact EU French and non-French tax residents equally so long as they are subject to the social security regime of another State.
Although stricter rules may apply, anyone seeking a refund should file claims before December 31st of the second year following the date of payment of such taxes as per the provisions of article L190 of the French tax procedure code.
Consequences outside the EU
For non-EU residents, it remains to be determined whether the Ruyter Decision will impact them and, in particular, whether they will be allowed to obtain a refund of the 15.5% social taxes based on the principle of "freedom of movement of capital."
In a different context, the French Supreme Court recently held in favor of Swiss taxpayers based on the freedom of capital applicable to non-EU residents. The Conseil d’Etat ruled the 33.33 % capital gains tax levied on real estate capital gains realized through a French SCI by residents of non-EU States was incompatible with the principle of freedom of movement of capital, as EU Member States residents generally suffer a 19% tax. The extension of this decision to the 15.5% social tax remains to be tested but refund claims should be filed by way of precaution given the two-year deadline.
Gibson, Dunn & Crutcher lawyers are available to assist with questions regarding the Ruyter Decision as well as issues of French tax law more generally. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, Jérôme Delaurière or Jeffrey Trinklein, or any of the following lawyers:
Jérôme Delaurière – Paris (+33 (0)1 56 43 13 00, firstname.lastname@example.org)
Jeffrey M. Trinklein - London and New York (+44 (0)20 7071 4180, +1 212-351-2344, email@example.com)
Nicholas Aleksander – London (+44 (0)20 7071 4232, firstname.lastname@example.org)
Hans Martin Schmid – Munich (+49 89 189 33 110, email@example.com)
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