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French Taxation

Higher Rate Capital Gains Tax Illegal

Thursday 04 December 2014

In a potentially landmark case, the French Supreme Court has ruled that the imposition of a higher rate of capital gains tax on non-residents is illegal.

The rate of capital gains tax on the sale of real estate in France differs according to whether or not you are EEA resident.

For those resident in France or another country of the EEA, the basic rate of tax is currently 19%; for those from outside of the EEA the rate is 33.3%. To both these basic rates is added the social charges at the rate of 15.5%.

Last year, we reported on a case in a Court of Appeal sitting in Lyon, concerning the higher rate of capital gains tax applied to non-residents outside of the EEA.

In the case, two residents of Switzerland owned a property in the Rhône-Alpes, through a French registered Société Civile Immobilière (SCI). The couple sold their property, in the process paying the higher applicable rate of capital gains tax.

Believing that under European law they should have been entitled to the lower rate, they sought a reimbursement of overpaid tax, which was refused by the French tax authorities.

This decision was upheld by the local court in Grenoble, but subsequently overturned by the Court of Appeal sitting in Lyon.

The court found that the imposition of a higher rate of tax was contrary to Article 63 of the Treaty of the Functioning of the European Union, concerning the free movement of capital between Member States and other countries.

Accordingly, the judges ruled that the couple should receive a reimbursement of overpaid capital gains tax.

Given the importance of this ruling the French government lodged an appeal to the Conseil d’État, the highest administrative court in France.

In a judgement rendered last month the Conseil d’État rejected the appeal by the French government.

In coming to their decision the judges stated that to reduce the profitability of property investment in France by a higher rate of tax, was enough to dissuade non-residents from investing in France, and so constituted a restriction on the movement of capital from another country, contrary to the articles governing the operation of the European Union.

Accordingly, the applicable rate of tax in this case was 16% (the rate at the time of imposition) and not 33%.

This ruling is entirely separate to the on-going dispute between the European Commission and France over the imposition of social charges on the property income and capital gains on non-residents, on which we reported last month. A ruling of the European Court of Justice on this issue is imminent.

Is the Decision Conclusive?

The question arises as to whether this ruling is conclusive and therefore the basis on which the government will need to change the law.

At this stage, nothing is certain, due to possible peculiarities concerning tax arrangements with Switzerland where there exists a non-discrimination clause in the tax treaty between the two countries.

However, it is noteworthy that in this case the judges made their decision, not on the basis of Franco-Swiss law, but that of European law.

The other uncertainty concerns the fact that the case relates to owners with a French registered SCI. It remains a little unclear whether the fact that the legal owner of the property was a French registered SCI made a difference in this case. The judgement seems to suggest not, but we cannot be certain.

Nevertheless, the decision of the Conseil d’État was also recently mirrored in a decision of the Court of Appeal (CA) sitting in Marseille, concerning two British citizens who were residents of Jersey.

In this case, which was heard prior to the Conseil d’État hearing, the owners also received a capital gains tax bill at the rate of 33% on the sale of their property near Antibes, which they challenged in the court.

The CA in Marseille came to exactly the same conclusion, and for the same reasons, as the Conseil d’État.

Claiming Reimbursement

Clearly, the decision of the Conseil d’Etat is of huge significance to all former international French property owners who have paid at the higher rate, and who may now be entitled to a refund of overpaid taxes. Those in the process of selling may also need to take steps to ensure they are taxed at the lower rate.

However, a legal ruling does not by itself mean that a tax that may be considered illegal results in an automatic refund of the overpaid tax. In order for that to happen it is necessary to make a claim to the tax office, and to do within a prescribed period.

There is some legal uncertainty in French law as to the prescribed period for capital gains tax claims, as some judges have limited it to 31st December in the year following imposition of the tax.

Certainly, the maximum period permitted would be no longer than two years following the year of imposition, but in such cases you would most definitely need tax agent representation in France.

Accordingly, if you were imposed in 2012, you would need to make a claim this year to stand any chance of restitution, and those imposed in 2013 are strongly advised to get their claim in to the tax office by the end of this year.

We are offering readers the opportunity to make a claim on a collective basis, under the auspices of a professional firm of specialist advisors. If you are interested in such an approach then contact us at

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