The government are proposing a major reform of social charges, affecting both residents and non-residents, but there is an element of smoke and mirrors about it all.
The social charges in France are called the prélèvements sociaux, and form part of the general body of social security contributions, although with no direct correlation to benefits.
The charges are imposed on most sources of income and capital gains including, since 2012, the French sourced rental income and property gains of non-residents.
The liability of non-residents to the charges has been hugely controversial, resulting in numerous cases in the courts in both France and Brussels, which we have covered extensively in the past.
Although the government have sought to try and get around awkward legal judgements, by reallocating the proceeds of the charges, most recently the court of appeal sitting in Nancy considered the charges remained contrary to European legislation.
With the likelihood that the French Supreme Court will uphold that decision, and with other legal challenges being made in the French courts and the European Court of Justice, they have clearly decided to throw in the towel.
In a statement to the National Assembly during the discussion of the finance bill for 2019 the government stated:
'The reassignment of the proceeds of the social charges remains poorly understood by some taxpayers and a source of important legal disputes. In addition, the necessity to respect European law in allocating the proceeds in an exclusive manner to finance certain social benefits constitutes a constraint that impacts adversely on the efficient management of the social security budget. This rigidity is incompatible with what has always been the purpose of the social charges, to facilitate a universal and conjoint system of social security.'
The change will mean than non-residents from the EEA who are in the social security system of another Member State will no longer be liable for social charges on rental income from France. They will also be exempt from social charges on the sale of French real estate.
The social security legal code is being amended as follows:
'ne sont pas redevables de la contribution les personnes qui, par application des dispositions du règlement (CE) n°883/2004 du Parlement Européen et du Conseil du 29 avril 2004 portant sur la coordination des systèmes de sécurité sociale, relèvent en matière d’assurance maladie de la législation d’un autre État, et qui au cours de l’année ne sont pas à la charge d’un régime obligatoire de sécurité sociale français.'
It is noteworthy that the amendment makes no distinction between residents and non-residents; it is merely their social security affiliation that is the relevant criteria. That follows the principle contained in the Nancy judgement, where the individual concerned was resident in France, but affiliated to the Swiss social security system.
Accordingly, those who are resident in France on an S1 health certificate of exemption from an EEA country, and who are therefore not affiliated to the French social security system, will be exempt from these charges. Although such persons already obtain exemption on their pension income, social charges on their capital/investment income and gains will also now be exempt.
The draft legislation grants no exemption to non-EEA residents, despite pressure from a significant number of parliamentarians for that to be the case. The universal exemption of all non-residents was also one of the recommendations made in a recent government sponsored report on improving international mobility, so it may well be that the scope of the change will be widened as it proceeds through the parliamentary process.
However, it is perhaps inevitable that there is a sting in the tail, for alongside the change the government proposes the creation of a new 'solidarity' tax of 7.5%, which will be allocated to the general budget, not the social security budget.
In introducing the tax the government stated:
'l’amendement prévoit de ne pas faire application de cette exonération au nouveau prélèvement de solidarité de 7,5 %, affecté au budget général de l’État'.
The new prélèvement de solidarité will be applied on the investment income (rents, savings, dividends) and capital gains of both residents and non-residents.
The tax will replace three of the existing minor charges (prélèvement social, la contribution additionnelle, prélèvement de solidarité) that go to make up the total of social charges, and there will also be some realignment between them.
If the proposals are finally passed in their current form, the scope and rates of the charges on pension and capital income and gains will be as shown below.
|Social Charges Reform|
*A reduced rate of 6.6% or 4.3% applies to those on a modest income and below a lower threshold the income is exempt.
This will mean that for those not exempt under EU legislation, the combined rate of 'social' charges remains unchanged, for all types of income and gains.
Those who are covered by the social security system in another Member State will only be liable for the 7.5% solidarity tax on capital income and gains, down from the current total level of 17.2%.
Non-Resident Income Tax
Nevertheless, in order to compensate for the (partial) abolition of social charges on EEA nationals, the government are proposing to increase the minimum rate of income tax on rental and investment income earned by all non-residents, from 20% to 30%. It will apply on income earned in 2018.
In their announcement the government state:
'le présent amendement propose de relever le taux minimum d’imposition applicable aux revenus de source française des non-résidents prévu à l’article 197 A du code général des impôts (CGI) de 20 % à 30 % en métropole, à compter de l’imposition des revenus de l’année 2018.'
The overall result is that the level of taxation on the French sourced income of non-exempt non-residents will increase, as they face a static level of 'social' charges, but an increase in income tax. For them the combined rate of social charges and income tax will increase from 37.2% to 47.2%.
The increase in the minimum rate is opposed by many parliamentarians in the majority party, and it is not inconceivable the government will be obliged to change their position before the proposal is finally enacted.
POSTSCRIPT: Rental and investment income below €27,519 pa remains taxed at 20%.
Non-residents do not benefit from the progressive scale of income tax in France on their French sourced income, although those who can prove on the basis of their total income that they would be entitled to pay a lower rate if they were resident in France, can make application for exemption from the default rate.
Claims for Reimbursement
The operative date for the new tax regime will apply to income earned in 2018 and capital gains arising from 2019.
There is no commitment to retrospective refunds of charges paid in the past.
As a result, Eve d'Onorio di Méo, a French tax lawyer specialising in the issue, states that:
"The abolition of social security contributions for non-resident EEA nationals will only be effective from 2019 onwards, so that those seeking a refund on the basis of the Nancy judgment must apply before the end of the year (December 31, 2018) for the property income earned in 2015 and the real estate gains made in 2016. It remains possible to claim next year for 2017 and 2018."
As well as non-residents, residents of France who obtain their health cover through an S1 certificate of exemption who have paid social charges on such income should also be eligible for a refund.