France has lost its tax war against British second home owners after the European Union's top court deemed it "illegal" to force them to pay social charges on gains from renting or selling their properties, reports The Telegraph.
The ruling by the European Court of Justice, which emerged on Thursday, means France is liable to reimburse tens of millions of euros to British and other EU non-resident owners who have let out or sold their properties in the past two to three years.
Some 200,000 non-resident British property owners in France were affected when the socialist government of President François Hollande in 2012 imposed a 15.5 per cent "social charge" on capital gains from the sale of second homes or rental income – a measure which it said would bring in 250 million euros a year.
Tax on rental income rose overnight from 20 per cent to 35.5 per cent, while capital gains tax on property sales rose from 19 per cent to 34.5 per cent.
The French finance ministry said it would "remove an unjustified tax advantage" for non-resident owners.
As a result, a British couple who bought a French property for 200,000 euros 20 years ago and were selling it for 750,000 euros would have to pay almost 60,000 euros in social charges on top of the existing capital gains tax. They received no credit against their UK tax bill for this amount.
In its February 26th ruling, the Court of Justice concluded that the tax violates EU law because a resident of a member state must contribute to the social security system of one member state only.
It is thus illegal under EU law for France to levy social charges on income and gains derived by non-French EU residents on selling or renting their French property.
The Luxembourg ruling came three months after Eleanor Sharpston, the European Union's top legal advisor, told the court that the French tax grab violated EU law because “a person exercising an activity in one Member State is only subject to social security regulation of that Member State.”
The Advocate General’s advice was based on EU precedents dating from 2000 and 1971.
Graeme Perry, a London-based French tax law expert, said the ruling was "good news for the many EU residents who have been forced to pay this charge".
He advised anyone who has not already submitted a claim to the French tax authorities to do so now.
The chances of being reimbursed are "very, very strong" for anyone who sold their second home in 2014, he said.
"If you have already made a claim, you should now write to the French tax administration asking for your money back and also asking for a refund of any tax agent's fees."
To limit the damage, the French recently imposed stricter deadlines on submitting reimbursement claims. These prevent anyone who sold in 2012 or 2013 from making a claim unless they did so by December 31st of the year following that sale.
These deadlines, however, "may be open to legal challenge", said Mr Perry.