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French Taxation

Social Charges on Non-Resident Furnished Lettings

Monday 05 September 2016

Many non-residents who previously did not pay social charges on furnished rental income in France have been hit by the charges this year.

During the last couple of weeks a trickle of mails has been arriving from readers who have received their French income tax notice for 2016 (2015 income), commenting on the fact that social charges of 15.5% have been imposed on their French rental income.

The readers concerned are non-resident landlords of furnished (mainly gîte) accommodation in France who in the past have not had the charges (prélèvements sociaux) imposed on such income.

The issue is a complicated one, and goes back to a change in the law in 2012 with the introduction of social charges on the capital gains from second home sales, as well as the French rental income of non-residents.

These charges were introduced through under Article 29 of the Loi n° 2012-958 du 16 août 2012 de finances rectificative 2012.

The law is a little murky, although there is clarity over the main elements of it.

Thus, under Article 136-6 of the code de la sécurité sociale, non-residents are liable for (at least) the Contribution Sociale Généralisée (CSG) on both unfurnished accommodation as well as on the proceeds of 'commercial' income, into which category falls rental income from furnished accommodation.

Article L. 245-14 also states that in relation to the same income: "Sont également soumises à (prélèvements sociaux), à raison des revenus mentionnés au I bis de l'article L. 136-6 du présent code, les personnes physiques qui ne sont pas fiscalement domiciliées en France"

So it would appear that under French law the tax authority is entitled to impose social charges on furnished accommodation.

Nevertheless, at the time the law was changed it was not entirely clear if the social charges applied to both unfurnished and furnished lettings, a critical point for most non-residents, as the vast majority of such lettings are furnished holiday homes.

In part this seemed to follow assurances given to the then British Prime Minister David Cameron by French President Francois Hollande that gîte accommodation would be exempt from the charges.

This was followed by published tax office guidance which suggested that the social charges would only apply on unfurnished accommodation.

However, the law on the issue was never changed to ensure that this assurance was put into action; it merely became an administrative doctrine, which appears to have been applied with no consistency across the country; some local tax offices have applied the charges whilst in other cases such income has been exempt.

One of the common threads we have observed in many of the mails we have received is that imposition of the tax charge has coincided with a transfer of administration of the tax return of affected individuals to the Centre for Non-Residents, where previously it was being handled by the tax office where the property was based.

If tax officials have ignored the law in the past, and they have now changed their position, it may not be unconnected with the fact that they have been obliged to find new sources of income to replace the refund of social charges illegally imposed on non-residents up to 2013 following a European court ruling in the landmark 'De Ruyter' case.

As we reported in our Newsletter, the French government subsequently changed the law in an attempt to subvert the decision for future rental income, a change which many consider still falls foul of European regulations, but on which both the European Commission and the French government remain silent.

Virginie Deflassieux, Associate Director of leading French tax advisors BDO Ltd comments: "The French tax administration has been very swift in 'closing the gates' on the refund claims that have been flooding in since the De Ruyter ruling. In changing the way these levies are now allocated, they have effectively relegated these charges to income taxation even though they are still written in the social code.

Although the change was introduced on 29 December 2015, it has a retrospective effect, and at the time of receiving their income the taxpayer would have thought that these charges would not be applicable.

When it comes to French rental income received by non-residents, in practice, the French authorities only applied the charges on unfurnished rentals received from 1 January 2012. However, as demonstrated in the assessments currently being issued in respect of 2015 income, this practice has now been extended to furnished lettings."

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