Overseas Chambers of Peter Harris

Maison de la Boucterie
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Jersey, JE2 7ZW

The French Conseil d'Etat strikes down article 164C CGI, as contrary to EU law and third country freedom of movement of capital

January 10th 2014

It does not take long for a decision of the Court of Justice of the European Union to have effect throughout the EU legal order when it benefits the taxpayer.

Article 164 C provides that any non resident of France who has residential property in France available for their use is liable to French income tax on three times the annual rental value of the property.

Previously, the French administration had argued that the Freedom of movement of capital standstill provisions in 1993 allowed it to maintain this type of discriminatory taxation.  The French administration is very good at ignoring the essential.

Unfortunately certain advisors in other jurisdictions had been advising non EU residents to file and pay the tax on a voluntary basis, rather than awaiting an enquiry. What is more, certain British nationals have also been taxed by the French administration on properties in France.  Whilst this phenomenon has been limited mostly to the area around Monaco, it is clear that the French administration have been attempting to take tax under article 164C in other areas.

A decision of the French Conseil d'Etat on 26th December 2013, N° 360488 applying an CJEU decision of 17th October, 2013, has confirmed that Article 164 C of the French tax code is in breach of EU law. Note that it did not see the need to refer the issue to the CJEU, as the law and the issues were sufficiently clear.  There is no appeal from their decision.

Those believing that the French administration's interpretation of its legislation is in principle an absolute should take note of this decision. The French Courts are able to interpret European Principles and apply these independently of a reference and of the administration's position.

The European Single Market is based on four fundamental freedoms, freedom of movement of goods, people, services and capital. As a general rule, the first three freedoms apply only to transactions or movements within the EU, but the freedom of movement of capital is expressed to extend to capital movements involving third countries as well. This is a point which renders several EU tax administration's positions on property in other EU States inadmissible.

Member states are prohibited from enacting rules that prevent or inhibit the free movement of capital into or out of the EU under article 57 of the Consolidated Version of the Treaty on the Functioning of the European Union . There are limits to this prohibition. In particular, by what is now Article 64.1 TFEU, "the provisions of Article 63 (prohibiting restrictions on the movement of capital) shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national law or Union law adopted in respect of the movement of capital to or from third countries involving direct investment - including in real estate - establishment, the provision of financial services or the admission of securities to capital markets".

The French tax authorities argued that if Article 164 C could be construed as a restriction on the movement of capital between Member States and third countries, it was in force on 31 December 1993, involved direct investment in real estate and was therefore valid under Article 64.1. The lack of integrity in the use of the conditional is incredible!

The Conseil d'Etat, basing its decision on a decision of the European Court of Justice of 17 October 2013,  C-181/12,  Welte said that direct investment in real estate, for the purposes of Article 64.1, meant investment in relation to an economic activity, not purely private investment, such as the purchase of a secondary residence, by an individual as part of the management of his private assets.

Whilst the decision addressed Monaco, a non EC territory, the principle is a general one.

The upshot of this decision is that Jersey residents are not liable to French income tax under Article 164 C and, where they have been influenced into paying it,  should be able to reclaim tax previously paid on this basis.

Those who have declared and paid, despite Overseas Chamber's previous position to the contrary, should contact the firms having  advised this action to institute reclaims of taxes unduly paid within the usual time limits.

Overseas Chambers can help in dealing with repayment claims and advising on other tax ramifications of the decision.

For more information please contact Peter Harris.