Second home owners in France face a new tax, but until the law is passed there are uncertainties about the scope of its application.

The French government has decided that non-residents who own holiday homes in France should be required to make a greater contribution to the general system of taxation.

Given that holiday home owners are already fully liable for the two local rates (taxe d’habitation and taxe foncière), it is not entirely clear why they should consider this to be the case.

However, an examination of the the statement from the government does suggest one reason may well be the desperate search for easy ways of paying for the nearly €2 billion giveaway through the planned reduction in the wealth tax, the Impôt de solidarité sur la fortune (ISF).

As a result, in addition to the normal local rates,non-resident second home owners will pay an annual tax equivalent the 20% of the rental value (valeur locative) of their property, used for the purpose of calculating the local property taxes.

The measure is applicable from 1st January 2012.

Exemptions

The details of the new law have yet to emerge, but it seems from what has been announced that two groups of second home owners are exempt.

Those who have left France but who were resident for at least three years out of the last ten years will not be liable, a concession that will be available for the next six years. This is likely to apply to many French nationals themselves who have decided to move abroad.

There is also a further exemption, which is likely to be of greater use to other nationals, and concerns those who let out their property.

The statement by the French government states that:

Corrélativement, l’article 164 C du code général des impôts (CGI), qui prévoit que les personnes qui n’ont pas leur domicile fiscal en France mais qui y détiennent un logement sont assujetties à l’impôt sur le revenu sur une base forfaitaire, serait abrogé.

What this seems to suggest is that those who obtain rental income from their property, on which they pay the normal 20% rate of income tax on net proceeds, will not be liable for the tax.

The draft proposal does not currently require that the property be let for a minimum period, or for a minimum amount.

Until the details of the law have been published, there remains some uncertainty about the scope of this exemption. We need to await more details before coming to any real conclusions.

EU Compliance

There also remains the issue of whether such a tax is compatible with European law, for those resident within the EU.

On this point, Algirdas Semeta a spokeperson at the EU told AFP that, ‘The commission will study the draft law, but we have to examine the wider reality.

In principle, EU member states are free to set their own taxes.

Limits must be respected with regard to laws covering the free movement of capital.

But there is no problem making a distinction between residents and non-residents -- unless their situations are directly comparable.

France already distinguishes between residents and non-residents, in terms of property income and allowances.’

Once again, there are lawyers in France who are arguing that that clause is not compatible with the free movement of capital and people, and it is likely there will be further discussion of this point over the coming weeks and months.