France: Proof of the taxpayer's affiliation with a foreign social security regime required to benefit from the exemption of social surtaxes; the position post Brexit

The Tax Court of Appeal  of Versailles emphasized in a recent judgment of 8^th September, 2022 that a taxpayer claiming a refund of social surtaxes on their French-sourced property income due to their affiliation with a compulsory European social security scheme must provide proof of their affiliation with their scheme for the period in which the liability would otherwise arises. If they do not provide that evidence, then they may not be able to claim the exemption.

Note that British applicants retain a Brexit protection under the Withdrawal arrangements and that the French tax administration have amended their previous position to take account of the CJEU's de Ruyter ruling.

The details

The Tax Court of Appeal of Versailles handed down a decision on 8 September 2022, holding that, to benefit from a non-application of social surtaxes in France for individuals affiliated with a social security scheme abroad, the taxpayer must effectively prove their affiliation with that scheme for the period.

The taxpayer involved was a Spanish tax resident who derived property income from renting French real estate properties in 2015. They were therefore subject to social surtaxes in France, as provided for by the law in force at that time. Like many taxpayers, the claimant sought a refund of social surtaxes on the basis of the De Ruyter jurisprudence of 26 February 2015 (CJEU, No. C-623/13) on the grounds that they were affiliated to the Spanish compulsory social security scheme. According to De Ruyter, individuals within the scope of European Regulation No. 883/2004 on the coordination of social security systems may only be subject to the legislation of a single state and, therefore can only be required to contribute to a single compulsory scheme. The claimant's request was well-founded since, during 2015, the social surtaxes were financing the French social security system.

However, the tax court of appeal rejected the taxpayer's request on evidential grounds because they did not provide proof of their affiliation with the Spanish social security system. The applicant had only provided a certificate dated 30 November 2016, in Spanish, which did not mention any period of affiliation. The court therefore ruled that in the absence of any evidence relating to the social security scheme to which she was attached in the year concerned, they could not rely on the provisions of Regulation No. 883/2004 to obtain an exemption from French social surtaxes.

This decision is interesting because the applicant's claims were dismissed on evidentiary grounds and not on legal grounds (claims based on the De Ruyter case law being generally accepted). It is, therefore, a general reminder of the importance of providing adequate evidence in support of any tax claim, which gives better chances of obtaining a favourable response and potentially reduces the duration of a tax litigation.

Proof can be provided by any means and will, therefore, depend on the circumstances of the case. In the context of a similar claim, the taxpayer could have provided a French translation at the beginning of the legal proceedings (ideally a certified translation) and could have requested that the foreign social security authorities issue a statement indicating the period of affiliation, if possible. Alternatively, the individual could have provided, for example, a copy of their foreign payslips for the relevant period, which would demonstrate the actual payment of compulsory social security contributions in the foreign country.

Since this decision, articles of the French Social Security Code providing for the liability to social surtaxes on passive income have been amended by the Social Security Financing Act for 2019, to draw the consequences of the De Ruyter case law and decisions that followed. These articles now provide for an exemption from social surtaxes referred to as "CSG" (9.2%) and "CRDS" (0.5%) for individuals who: "by application of the provisions of Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems, are subject to a health insurance law of a country in the scope of this regulation's provisions and who are not covered by a compulsory French social security scheme".

This exemption from the CSG and CRDS benefits applies to (i) non-residents who receive French-sourced real estate income and (ii) French tax residents who receive passive income (dividends, interest, capital gains on movable assets or real estate property, rental income, etc.), provided that they are affiliated with a compulsory scheme within the European Union or in Switzerland. In this case, their income is only subject to the solidarity social surtax of 7.5%.

However, note that taxpayers who are affiliated with the social security system in the United Kingdom may also benefit from this exemption despite Brexit. The provisions of the protocol on social security coordination signed between the United Kingdom and the member states of the European Union on 24 December 2020 provide for a unitary principle similar to that existing in Regulation No. 883/2004. The tax authorities have amended their "frequently asked questions" on Brexit to confirm this point.

However, obtaining such a certification from HMRC is challenging as the website link only appears to be available to non-residents or to those residents seeking to;make a benefit claim, as distinct from a tax claim in the EU, Norway, Iceland, Switzerland or Liechtenstein. The old situation as to obtaining certification of NIC contributions to obtain tax relief in Europe has therefore remained unchanged and as unsatisfactory as it was prior to de Ruyters and Brexit: see https://www.gov.uk/government/publications/national-insurance-statement-of-national-insurance-contributions-ca3916

In practice, the benefit of the CSG and CRDS exemption will be obtained in different ways depending on the nature of the income or gain. The French Social Security Code sets out that, from now on, taxpayers must provide the following supporting elements:

• For income that is not subject to any withholding tax by an intermediary or the paying institution (e.g., rental income): The taxpayer must check a specific box in their annual income tax return.
• For dividends or interest paid by a financial institution or a company: the taxpayer will have to provide a sworn statement to the paying institution in which they certify that they are affiliated with the compulsory social security system of a state that is party to European Regulation No. 883/2004⁵.
• For real estate capital gains on which a withholding tax is made by a notary or a tax representative: the taxpayer must prove their affiliation with a social security scheme of the European Union, Switzerland or the United Kingdom by producing the S1 Form, the A1 Form or an equivalent affiliation certificate.

Because of the importance of this exemption, which reduces taxes by 9.7% (7.5% instead of 17.2% social surtaxes), it is important that the taxpayers concerned (e.g., non-residents, tax residents seconded abroad with regard to social security, tax residents in a multiple activity situation, etc.) check that the CSG and CRDS have not been paid when an exemption was available.