The amendment repealing the flat-rate income tax on some non-residents
(Articles 164 C & 197 A of the French Tax Code)
The Amending Finance Law 2015 repeals provisions regarding the flat-rate taxation of some residents of third countries who own one or more residential properties.
This is to reflect decisions from both the Court of Justice of the European Union and the French Conseil d’Etat and shall take effect for the taxation of income of the year 2015.
Taxpayers domiciled outside France are, in principle, taxed solely on their French source income.
However Article 164 C of the French General Tax Code provided that people who did not have their tax domicile in France but who had in France one or more residential properties, in any capacity whatsoever, directly or under cover of third parties, were subject to income tax on a base equal to three times the actual rental value of this or these properties unless the French source income of the concerned parties was higher than said base, in which case the amount of such income would be the basis for taxation.
This measure included several exceptions that significantly reduced its scope.
In deed said provisions did not apply to:
- French nationals who could prove they underwent in the country where they had their tax residency a personal tax on all of their income and if said tax was at least equal to two thirds of the one they would have had to undergone in France on the same tax base;
- French nationals whose expatriation was justified by professional requirements and whose tax domicile was located in France continuously for four years prior to their transfer.
- Taxpayers domiciled in countries or territories having concluded with France a tax convention to avoid double taxation with respect to taxes on income.
Recent court rulings
Drawing on the consequences of decisions from both the Court of Justice of the European Union (CJEU) and the French Conseil d’Etat, Article 21 of the Amending Finance Law 2015 repeals the provisions of articles 164 C and 197 A b of the French General Tax Code.
- Preliminary ruling Welte of the CJEU dated October 17th, 2013 2013 (Case C-181/12 Welte of October 17, 2013)
It stems from said ruling that patrimonial property investments, made for private purposes i.e unrelated to economic activity, do not constitute direct investment within the meaning of Article 57 of the Treaty establishing the European Community (TEC).
The opinion of the Advocate General MENGOZZI delivered on June 12th, 2013 regarding said case shed light on the interpretation of Article 57(1) EC, and its applicability.
“41. As I have already pointed out, Article 57(1) EC enables Member States to maintain, vis-à-vis third countries, restrictions existing on 31 December 1993 on the movement of capital involving ‘direct investment – including in real estate’.”
The question whether the French rules above mentioned fell within the temporal and material scope of the standstill clause was less straightforward.
The ratione temporis condition laid down in Article 57(1) EC was met by Article 164 C of the French General Tax Code, and therefore we will not go into further detail in the present article.
However as regards the material scope of Article 57(1) EC, it should be noted that there were legitimate doubts as to whether capital movements in the form of investments in real estate unrelated to economic activity, regulated by the tax legislation of a Member State entailed ‘direct investment – including in real estate’ for the purposes of Article 57(1) EC.
“50. As I have mentioned, in the absence of a definition of ‘capital movement’, the Court has, so far, consistently relied on the definitions contained in the nomenclature in Annex I to Directive 88/361 and the associated explanatory notes in order to interpret both Article 56 EC and Article 57 EC. (30) …”
“54. According to the nomenclature, investments in real estate covered by category II, which are defined in the explanatory notes as ‘[p]urchases of buildings and land and the construction of buildings by private persons for gain or personal use’, are investments ‘not included in category I’, that is to say, not direct investments.”
“55. Thus, the reference in Article 57(1) EC to ‘direct investment – including in real estate’ (33) should be construed as covering investments in real estate which constitute direct investments, that is to say – to paraphrase the explanatory notes – investments in real estate of such a kind as to establish or to maintain direct links with an entrepreneur or an undertaking in order to engage in an economic activity.”
“56. By contrast, investments in real estate of a financial nature, which are unconnected with the pursuit of an economic activity, do not fall within the scope of Article 57(1) EC.”
- Two judgments of the State Council of 26 December 2013 (No. 360488 and 332885)
Based on the conclusions of the ruling Welte, the French Conseil d’Etat in two successive decisions concluded that the flat-taxation of non-residents under article 164 C of the General Tax Code was contrary to the principle of free movement of capital in Article 56 TEC.
Article 164 C aimed to « submit detention in France of residential property to a tax payable by persons not having their tax domicile in France,». The court considered « that such a measure is likely to discourage non-residents to acquire or hold such property ».
The Amending Finance Law 2015
Article 21 of the Amending Finance Law 2015 (Law n°2015-1786 dated December 29th, 2015) abolishes the flat-rate taxation of certain non-residents owning one or more residential properties in France by repealing the provisions of Article 164 C of the French General Tax Code, a long side the provisions of Article 197 A b of said code.
Previously during the session en hémicycle on December 1st, 2015 Valerie Rabault, ‘rapporteure générale de la commission des finances, de l’économie générale et du contrôle budgétaire’ declared that: « Our Committee had already issued a favorable opinion on this amendment, but in addition, the services of the Ministry of Finance – whom I thank – indicate that this provision would concern 114 persons for a tax revenue of 86 000 euros. I think that the State can afford to do without said sum!
Said measure applies from the taxation of income of 2015.
Lucy OVERFIELD & Edouard FIGEROU