In depth

The Tax Court of Appeal of Versailles rendered a decision on 8 September 2022, reminding 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 said scheme for the concerned 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. Thus, like many taxpayers, the claimant sought a refund of social surtaxes on the basis of the De Ruyter case law of 26 February 2015 (CJEU, No. C-623/13) and on the grounds that they were affiliated with the Spanish compulsory social security scheme. According to this case law, individuals that are in 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, only contribute to a single compulsory scheme. The claimant's request was well-founded since, during 2015, the social surtaxes were indeed financing the French social security system.

However, the tax court of appeal did not accept the taxpayer's request because the taxpayer 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 of which she depended in the concerned year, while she is the only one able to provide precise or conclusive evidence that would be likely to establish her situation."

The applicant 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 favorable 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 would have been well-advised to provide 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. Otherwise, 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. Thus, these articles provide for an exemption from social surtaxes called "CSG"¹ (9.2%) and "CRDS"² (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) nonresidents 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%³.

It should also be noted that taxpayers who are affiliated with the social security system in the United Kingdom may also benefit from this exemption despite Brexit⁴. Indeed, 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 unity 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.

In practice, the benefit of the CSG and CRDS exemption will be obtained differently depending on the nature of the income. 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 concerned taxpayers (e.g., nonresidents, tax residents seconded with regard to social security, tax residents in a multiple activity situation, etc.) check that the CSG and CRDS have not been unduly paid.

1 General social contribution

2 Contribution for repayment of the social debt.

3 As the 7.5% solidarity surtax is now allocated to the general budget of the state, it remains payable by taxpayers.

4 See our tax alert dated 4 February 2021 on this subject: "Impact of BREXIT on social security levies: towards a new litigation concerning the social security levies applied to taxpayers affiliated to the British social security system?"

5 This certificate is valid for three years and must specify the scheme with which the taxpayer is affiliated, the affiliation number and the date of entitlement. The template of this certificate was published in a decree dated 29 July 2019