France - Article 164c Update - December 2011


French Tax Code: Article 164c

In recent years there have been various changes regarding the application of this article. A recent decision by the Supreme Court has now clarified the application of Article 164c.

Article 164c of the French Tax Code states that:

- Individuals who are non-resident in France for French tax purposes, and

- Who have at their disposal one or more properties in France, whether directly or indirectly, may be subject to French income tax.

The tax is calculated on a deemed income equal to three times the notional rental value of the property.

However, if an individual is resident in a country which has a double taxation treaty with France, they might be exempt from this tax, depending on the terms of the treaty, or if they can show they have paid at least two thirds of the tax they would have paid, had they been tax resident in France.

Application to persons who are not resident in a tax treaty protected country
This tax should be considered for any property owner who is not resident in any country (so called “tax nomade”). It should also be taken into account by residents in countries which have not signed a double tax treaty with France allowing the exemption. In this respect, it is interesting to note that France and Hong Kong have recently signed a double tax treaty, which protects Hong Kong tax residents against this tax from next January.

Application to Monaco residents
The application of the article is of particular concern to Monaco residents because there is no double tax treaty between France and Monaco which allows the above mentioned exemption for Monegasque residents.

A well-known administrative Supreme Court case known as the “Biso case” dated June 2003, first instituted a limit to the application of this tax to Monegasque residents. The court said that nationals of countries which have signed a double tax agreement with France including a non-discrimination clause, applicable to nationals of both countries, should be exempted from this tax.

Then, another case law dated 30th September 2008  stipulated that all European nationals, resident in Monaco should not be subject to this tax.

However, a decision of July 2011 from the Supreme Court overruled this last case law and decided that this tax was not contrary to the freedom of circulation of capital and could then apply to EU nationals resident in Monaco.

Part of the argument was that the court considered  that the standstill provision included in the EU Treaty, (which allows member states to  restrict free circulation of capital),  was applicable and legitimates the article 164c. We must say that this argument is contestable. We have found other lower French court decisions, as well as a CJCE decision, considering that the standstill provision does not apply to real estate investments. These investments were not considered by these courts to be “direct investment”.
The July 2011 case has now been referred back to the appeal courts for re-consideration.

Impact on British nationals living in Monaco
With effect from 1st January 2010 in France, a new Tax Treaty came into effect between France and the UK. The new Treaty’s non-discrimination provisions do not offer the same protection to UK nationals resident in Monaco as the previous Treaty.

Unless and until the recent case law is overruled, they fall within the scope of this tax. A specific analysis of their situation should therefore be organised.

Our recommendations:
Until the July 2011 decision is overruled, our advice would then first to check if the Monegasque resident can benefit from the exemption of this tax under the “Biso case” law mentioned above. They could indeed be exempted thanks to the tax treaty signed between France and their residence country.

They could also rent their property, so that they do not have the disposal of it, until the court of appeal decision.

Should they decide to invest in other French assets to have other French income, this could allow them not to be taxed on the forfeit basis.

Any client who is effectively taxed could also decide to take legal opinion and may decide to go to litigation.