International tax laws are contained in the Double Tax Treaties.
Whilst these strive to avoid double taxation, their main aim is in fact to determine firstly the country having first rights to apply their laws to the taxpayer, and then to whom exactly these rules apply.
The Treaty then lists sources of income and the rules that apply to them in whether or not they are assessed and taxed in the country of origin or in the country or residency.
In most cases this is successful but, for example, in the case of foreign taxed interest, if the interest is paid to the taxpayer net of foreign taxes, then it is this net income that is declared in France and taxed … resulting in more tax overall being due than if the income had been received gross (without any tax deduction).
One of the current issues, however, is the social charges, these being charged on the basis of the French Social Security Law. The reason these are currently an issue is that there are some seven sources of taxable income or gains to which these charges – for one reason or another – do not apply. And as the uncollected social charges on these sources could amount to some 8 billion euros annually, evidently the French are keen to recoup these charges.
As a result the French Fisc have been playing games over the last few years in order to find ways of able to levy these ‘social charges’, but these mild attempts at one source of income have been fraught with EU court cases preventing them from doing so since the Court always finds that the fact that as some of these ’social charges’ fund the French social security system, none of the ‘social charges’ can be levied since contrary to an EU Directive from 1971, Directive 1408/71, which states that social security contributions are only paid in one country.
Due to several years of failed attempts, the French changed their Social Security law in 2016 to re-asses which of the ’social charges’ funded the social security system, and, as a result, the ’social charges’ now fall into two groups : one that funds the social security system, and one that does not.
For 2019 income tax declarations onwards, on 2018 income, the Fisc has stated that they are applying the ’social charges’ only to foreigners with French rental income on the following basis :
taxpayers resident in the European Economic Area (EEA) 7,50%
taxpayers NOT resident in the European Economic Area (EEA) 17,20%
The issue is now that, for those in the EEA, since these charges are not social security charges, how does the taxpayer obtain relief in their resident country since these charges are outside of the Double Tax Treaties.
More so, for those outside of the EE, especially Americans, since the 17,20% includes the ‘social charges’ that fund the French social security system, this charge seems inappropriate.
Quite where all this is intended to go is unclear, save for the fact that the Fisc seem to have developed a clear intention that the ’social charges’ should apply if a source of income has not been made liable to the social security system of another country.
But returning to income tax, the French are also incorrectly applying the Double Tax Treaties in the fact that the Fisc insists on also applying French national law (and in particular article 4A and 158), but this cannot be done since the Double Tax Treaties over-ride national tax laws and therefore it is one or other of the laws that apply, not both.
And here again there are issues for foreign national residents, in that the Fisc are incorrectly taxing certain foreign sources of income, to then give a credit, presumably to then have the right to levy the ‘social charges’ since these can only be applied on income that has been taxed (whether or not a credit its then given).
Our philosophy is to stand for both the principle behind the Double Tax Treaties and their correct application.