New tax on holiday homes in France (Guest Blog)

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France are proposing to add social charges to the tax liability that non-French residents pay on their rental income and capital gains tax on sale. Until now, this charge has been restricted to French residents, as the ‘social charge’ (not to be confused with social security) has been levied to pay off a French social security debt. Social charges in France actually raise more revenue for France than income tax. The social charges are covered by the double tax treaty, and are therefore considered to be a tax on this basis.


In one way this does bring parity to the table, as non-residents have not paid as much in France as residents on their French source rental income or gains on disposals of French property. But it will add significantly to the cost of owning your holiday home if you let it out, or sell it. That said, if the property is not let, no tax will apply. If M. Hollande’s other proposals go through, if the property is sold after 22 years, tax will not be payable, and neither should social charges, and the taxable gain will be reduced from the 3rd complete year of ownership onwards.


So yes, although many people will be facing additional taxes, they need to review their position to see just how much this would affect them – it might not be quite as bad as they think. They also need to consider that if they are UK resident, they may have a UK liability – as long as the French liability is lower than this, it can still be offset against the UK liability and overall, they will not have paid any additional tax – the balance of what they have paid between France and the UK has shifted instead.


A spokesperson at Blevins Franks who specialise in tax and wealth management for UK expatriates said: "This is an interesting move in that it effectively brings non-French residents into line with how French residents are taxed on property if they let or sell their property. We plan to sit down with any of our affected clients to discuss the implications for them and their tax planning, but those who are living in France and not declaring themselves should take a look at their position, as now being a non-resident is unlikely to be an advantage. That said, because of the way French tax works, many of those not declaring themselves in France may be paying more tax than they should in any case, and should take advice regarding their positions."


By making the tax retrospective from 1st January 2012, M. Hollande is opening himself up for significant opposition.


Last year, plans to tax non-residents on their French properties by Nicolas Sarkozy had to be abandoned after a massive outcry by both French expatriates and other non-residents. What will be the fate of this new planned tax?


The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.



Author - David Franks, Blevins Franks Financial Correspondent


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It does appear as though Hollande has, in part, been true to his word on this matter as the new law only refers to unfurnished lettings (revenus fonciers) being liable for the charges, so that furnished holiday lettings by non-residents are exempt. It is to be hoped the detailed regulations will be published that will confirm this is the case. Sadly, capital gains on sales remain liable.

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Update from Mary Taylor;

After Hollande's visit with UK Prime Minister David Cameron on 10th July,

the French President indicated that he may not levy social charges on UK

residents renting out French properties.

There was always a question over whether the proposal would pass EU

anti-discrimination legislation, and after the meeting a spokesman for

Cameron said that they had wanted to be sure that there would be no

discrimination against British citizens, and "we are reassured on that".

However we may have to wait until the latest round of tax reforms goes

through parliament to have any certainty on the issue, for example whether

the tax has been scrapped completely or if France is looking for other ways

to tax property.

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Thanks for the update David

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It seems from a statement made by President Hollande during a press conference with David Cameron that this proposal has been dropped.

http://www.telegraph.co.uk/news/politics/9390225/David-Cameron-reassured-over-French-tax-grab-on-holiday-homes.html

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Very interesting Finn.

At the end of the day, when it comes to rules, taxes etc, my firm view is that one should take advice based on one's own set of circumstances and not rely on generalities. In my experience, pitfalls and opportunities for that set of circumstances can then be best identified and appropriate solutions legitimately applied. it will not always be a solution of one size fits all. :) Bon weekend.

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Are we going to discuss the apparent increase (more than doubling) on ISF? I have been informed that French resident life income beneficiaries of UK trusts where joint assets are over 1.3 million euros the rate of taxation is to be doubled from an annual 0.25% to 0.55%. It matters not that such a beneficiary has no access to the trust capital and may have themselves very few assets at all. Under such circumstances ISF becomes a tax on income not fortune. I have been informed that properly no charges sociaux should apply to any income from rented out property in the UK but will apply to interest from bonds and dividends. On the brighter side my holiday home in France has been mine for 40 years and the new tax seems a disincentive to let it out at all. To give Hollande 35.5% of net income seems an absolute joke when the Breton letting season is about 12 weeks a year if you are lucky and maybe 400 euros a week in July and August. I do know that the French hotel trade has been complaining about competition from B and B and gites etc so this is probably a sop to them.

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I'm sorry to disagree with you, but there are a number of errors in that blog:

"The social charges are covered by the double tax treaty"

No they are not. The British-French double tax agreement of 15/10/1987 concerns the following French taxes (Art. 1 1 b): "L'impôt sur le revenu, l'impôt sur les sociétés". Not social charges. Yes they are: The current treaty in force is the treaty signed in 2008 and which came into force in France on 1st January 2010. Article 1(b)(v) and (vi) covers the CSG and CRDS.

In the EU, national social security laws are coordinated by Regulations 883/2004 and 987/2009, and before that by Regulation 1408/71 of 1971. These Regulations don’t interfere with national social security law, but they define which country’s law applies, depending on the situation of each person. There is no exclusion of social charges related to real estate in these Regulations; they apply generally to social security law. Article 11.1 of Regulation 883/2004 is very clear in pointing out that “persons to whom this Regulation applies shall be subject to the legislation of a single Member State only.” The introductory note 18a points out that “the principle of single applicable legislation is of great importance”. Whilst social charges were brought in to pay a social security liability, their inclusion in tax treaties does show that they can be seen as a tax, not as a social security charge (social security is also only payable on earnings, whilst social charges are payable on all forms of income). Therefore social charges are not included within the social security directive.

Not surprisingly, the Regulation goes on to define that a person who works is subject to the legislation in the country where he/she primarily works, and that if he/she doesn’t work, the legislation applicable is that of the country of residence.

Hence, in the case of an EU national working in the UK, or not working but resident in the UK, and having a secondary residence in France, only UK social security law applies. In order to collect French social security contributions from this person, French social security law would have to apply, but Regulation 883/2004 explicitly rules out that more than one national social security law can apply for the same person at the same time.

In other words, it is my belief that collecting social charges of French real estate belonging to a non-resident EU national would be a breach of EU law, except from special cases where for example a British resident primarily works in France and is thus subject to French social security law.

In the case of third countries for which EU law doesn’t apply, France has signed bilateral social security agreements with a number of countries, for example the United States. This bilateral agreement, signed in Paris 2 March 1987, lays down principles similar to those of the EU Regulation, namely that a person occupied in for example the US is exclusively subject to US social security law (or what the Americans call welfare), except in case of temporary assignment not exceeding five years. There is no definition for a person not working.

My conclusion is similar to my conclusion in the case of EU law, that collecting social charges on French real estate from a US resident would be a breach of this bilateral agreement. Please note my comments above about social charges not being social security contributions. Furthermore, all of these comments refer to employments and working; France are proposing to charge social charges on French source rental income and gains of non-residents of France, not employment income.

"if the property is sold after 22 years, tax will not be payable,"

The correct number of years is 30. Code général des impôts Article 150 VC .

" taxable gain will be reduced from the 3rd complete year of ownership onwards"

It is only after the 5th year that the taxable gain is reduced. Code général des impôts Article 150 VC This is stated because it is extremely likely that Hollande’s other proposals for capital gains tax will come into force shortly, given that he has a majority in the French Parliament. This may be a little premature, but this is actually more beneficial than the current rules, so we should all hope that these pass into law.

" if they are UK resident, they may have a UK liability – as long as the French liability is lower than this, it can still be offset against the UK liability "

No, there are no such provisions for social charges, only for tax. Since social charges can only be claimed by one country, contrary to tax, there is no need for such provisions. Yes, there is such a provision because social charges are covered by the current UK/France treaty – please see my first point.

I think it's important to keep information objective and correct in such a situation"

You are obviously a valuable member of the network Finn. Thanks for the debate. It will be interesting to see how Hollande will do with enacting his proposals. Thanks

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Dear Finn

We are looking into your commments and will reply more fully later.In the meantime, please be aware we are talking about the latest proposals of Hollande. This is where the 22 years period on CGT somes in "If M. Hollande’s other proposals go through, if the property is sold after 22 years,". A change from 30 to 22 is proposed.

Thanks

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I agree with Finn. It is much too early to panic about this announcement. It is definitely contrary to EC law, and, therefore, illegal, so even if enacted it will no doubt be challenged in the courts.

Only those resident in France are liable for the social charges, and there is case law from the European Court of Justice going back several years which supports this view.

It also current French law and if national law is now changed to create this new tax on property sales and rents, it will open up a huge can of worms for all expats living in France, many of whom are exempt from social charges through S1 health cover.

Accordingly, it may be no more than a Hollande making a political statement about 'soaking the rich' only for the measure to quietly later lapse as it makes its way through parliamentary process. It will not be the first time in the first few weeks of this government that they have had to back off early promises.

Let's all hang on a bit before we call for the lifeboats, although no harm done in making your voice heard to the UK and French governments.

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Hi Finn

No need to apologise, I didn't write this piece, it was published on behalf of Blevins Franks, I have asked them to comment.

Thanks

James