Brexit and French social contributions for individuals
On January 31st, 2020, the United Kingdom definitively withdrew from the European Union, causing growing concerns for British nationals resident in France, particularly on personal taxation issues. However, this withdrawal was formalised by an agreement of January 24th, 2020, between the European Union and the United Kingdom. This agreement was published in the Official Journal of the European Union on January 31st, 2020 (OJ L 29, 31.1.2020, p. 7 – 187) and entered into force that same day at midnight.
The withdrawal agreement first establishes a « transition period » until December 31st, 2020, during which, European rules continue to apply in the United Kingdom. This withdrawal agreement also provides for a set of measures intended to apply after this transition period.
This departure of the United Kingdom from the European Union results in potentially unforeseen consequences for social contributions applied to the income of some individuals such as tax residents of the United Kingdom who receive capital income from French sources (III), or some French tax residents, and in particular British pensioners residing in France (II). Up to now, these two categories of taxpayers have benefited from a special regime regarding these social security contributions (I).
I. Social contributions (Prélevements Sociaux) applied to the income of non-residents and British pensioners before Brexit
The application of social contributions, before Brexit, was relevant to French tax residents and also to individuals who were resident in the UK but receiving capital income from French sources.
This question was applicable both for the earned income and pension or state benefits of French tax residents (A), as for the capital income of these same residents, but as well for property income of non-residents registered to a social security scheme of another country of the European Union (B).
A. Social contributions applied to earned income or pensions, states benefits etc of British pensioners before Brexit
In accordance with the provisions of Article L. 136-1 of the French Social Security Code, activity or replacement income from foreign sources are subject to social contributions, when the taxpayer fulfils two cumulative conditions:
- he is tax resident in France under provisions of article 4B of the French Tax Code for the purposes of income tax,
- he is in insured by a French health insurance scheme.
If the taxpayer fulfils these two conditions, social contributions are then due on his earned income or pension income regardless of the country of origin of that income, (subject to any provisions in the Double Tax Agreement that over-rides domestic legislation for these types of income).
These types of income “earned income, pension income, state benefits” are usually categorised as:
- unemployment benefits;
- invalidity pensions;
- allowances paid by a social security system;
- retirement pensions (National Insurance or private).
For the application of the provisions of Article L. 136-1 of the Social Security Code, it is necessary to define the concept of « insured by a French health insurance scheme« .
However, this definition is clarified by EU regulations number 883/2004 and 987/2009 on the coordination of social security systems and applicable since May 1st, 2010.
In fact, under the provisions of Article 17 « Residence in a Member State other than the competent Member State » of Regulation 883/2004:
“An insured person or members of his/her family who reside in a Member State other than the competent Member State shall receive in the Member State of residence benefits in kind provided, on behalf of the competent institution, by the institution of the place of residence, in accordance with the provisions of the legislation it applies, as though they were insured under the said legislation.”.
This means that an insured person of a Member State of the European Union, say, the United Kingdom, can register with the health organizations of the country of the European Union in which he resides, say, France, even though he remains insured in the first country and that the institution of this first country assumes the financial cost of providing health benefits.
The healthcare in the country of residence is provided for the insured person via the « portable » document, which is available to both “posted” workers and for retirees in receipt of retirement pensions. The document is known as the form S1 « Registration for health insurance benefits« .
Thus, being in receipt of the form S1,, allows a retiree receiving a retirement pension paid by a member State of the European Union to register with the health and social security administration in the other country of the European Union in which he would like to reside.
However, under these conditions, he is not a financial charge on the social security system of his country of residence but remains financially a charge of that country from which he receives a retirement pension.
Consequently, the tax resident of France receiving a retirement pension from another country member of the European Union is not “a charge, in any capacity whatsoever, of a compulsory French health insurance scheme”, and therefore, social contributions do not apply to that individual’s earned income (for a posted worker) or pension income from foreign sources.
It should be noted that in the case of British pensioners resident in France, they are issued the S1 form only when they start to receive the “State pension”, paid by the British government, from their “National Insurance” state pensionable date.
However, in many cases, British retirees claim rights to one or more private pensions prior to their eligibility for state pension. In this case, they must wait to receive the “State pension” to be able to be covered by the French regime via their S1 form.
On the other hand, if they join the social security regime in France, for example by becoming a “Micro-Entrepreneur”, they are directly insured by the French healthcare system and must therefore pay social contributions on any earned or pension income from British sources.
B. Social contributions applied to the earned income or pensions, state benefits etc of British pensioners before Brexit following the “De Ruyter” case
The judgement handed down on the “De Ruyter” case in the European Union Court of Justice marked the beginning of a case law “saga”.
In this ruling (EUCJ, Feb. 26th, 2015, C‑623/13), the European High Court was called upon to rule on a preliminary question from the French “Conseil d’Etat”, on compliance with European legislation re. social contributions applied to the French capital income, where the recipient was affiliated to a social security scheme in another European country. The European Union Court of Justice then held that:
“the proceeds of those levies are allocated specifically and directly to the financing of certain branches of social security in France or to the discharge of their debts”.
The Court therefore considered that “those levies therefore have a direct and sufficiently relevant link with the legislation governing the branches of social security listed in Article 4 of Regulation No 1408/71, irrespective of the absence of a link between the income from assets of taxable persons and the pursuit of a professional activity by them”.
This decision therefore called into question the imposition of social contributions on the capital income of persons affiliated to a social security scheme of another Member State of the European Union.
Taking into account this judgment, the French “Conseil d’Etat” took a decision on July 27th, 2015 (CE, July 27th, 2015, n°334551) confirming this position and opening the way to numerous requests for refunds of prélevements sociaux contributions previously paid by those persons in the same situation as Mr de Ruyter!
Consequently, to take account of this case law and limit subsequent disputes, the French legislator modified, from 2016, the allocation of social contributions from capital income of persons affiliated to a social security scheme of another State member of the European Union, this time trying to comply with the requirements of Regulation 883/2004 of April 29th, 2004.
However, by judgment of May 31st, 2018, the Nancy Administrative Court of Appeal (CA Nancy, May 31st, 2018, n°17NC02124) questioned the compliance of these modifications, by ruling:
“Considering provisions of article 3 of the European regulation 883/2004 of April 29th, 2004, the only circumstance that the social contributions have been, since the entry into force of the Social Security Financial law for 2016, allocated to the financing of non-contributory benefits branches cannot suffice to exclude them in principle from the scope of the said European Regulation”.
The French Minister of Finances appealed to the “Conseil d’Etat” against this ruling of the Nancy Court of Appeal, but by a judgment of July 1st, 2019, “Conseil d’Etat” (CE, July 1st, 2019, n°422780) dismissed his appeal on the ground that:
“The court, judging by a sufficiently reasoned judgment that these contributions, the proceeds of which are allocated, even partially, to the Fund for the amortization of social debt, participate in the financing of the French social security system, and are thus subject to respect for the principle of unicity of legislation set out by article 11 of the European regulation of April 29th, 2004, did not commit any misinterpretation of the law”.
Consequently, people affiliated to the social security scheme of another Member State of the European Union should not have their capital and investment income subject to social contributions.
However, to take account of this caselaw “saga”, Article 26 of the Social Security Financial law for 2019 limited the liability of these taxpayers to the “Prélèvement de solidarité” at the rate of 7.5%.
Therefore, tax residents of France such as retirees, receiving retirement pensions from the United Kingdom (provided they hold an S1 form), or tax residents of the United Kingdom receiving French capital or investment income but not affiliated to the French social security scheme find themselves now subject to this single “Prélèvement de solidarité” at the rate of 7.5% on their capital or investment income instead of the general rate of 17.2%
These two situations are therefore potentially impacted by the United Kingdom’s exit from the European Union.
II. Social contributions applied to the income of British pensioners after Brexit
As mentioned above, UK pensioners in France with an S1 form do not see their earned income or pension income subject to social contributions; their capital and investment income is only subject to “Prélèvement de solidarité” at the reduced rate of 7.5% following the Social Security Financial Law for 2019.
Therefore, the eventual departure of the United Kingdom from the European Union has fuelled much anxiety on the part of British pensioners tax residents in France.
However, their situation was provided for in the January 24th, 2020 Withdrawal Agreement between the European Union and the United Kingdom.
Indeed, Title III of the agreement provides for a “Coordination of social security systems”. More specifically, article 30 of the agreement states that:
« 1. This title applies to the following persons:
b) nationals of the United Kingdom who are subject to the legislation of a Member State at the end of the transitional period, as well as members of their families and their survivors.
2. The persons referred to in paragraph 1 shall be covered as long as they continue to be continuously in one of the situations set out in that paragraph and which concerns both a Member State and the United Kingdom”.
Finally, Article 31 “Social security coordination rules” indicates that:
“The rules and objectives set out in Article 48 TFEU, Regulation (EC) No 883/2004 and Regulation (EC) No 987/2009 of the European Parliament and of the Council shall apply to the persons covered by this Title”.
This means that even after the transition period, British nationals resident in France for tax purposes and registered with the French Social Security Administration via the S1 form before December 31st, 2020, shall not only continue to be covered by the system of coordination of social security, but also to benefit from the exemption from social contributions on their earned income or pension income. Furthermore, the reduced rate of 7.5% of social contributions will continue to apply re. their capital and investments income.
III. Social contributions applied to British residents receiving French capital and investments income after Brexit
The exit of the United Kingdom from the European Union also has consequences for tax residents of the United Kingdom who receive capital and investments income from French sources. via investments with, for example, French banks.
However, in their case, Brexit has serious consequences because the Withdrawal Agreement does not provide for their situation. In fact, as the United Kingdom will become a third country after the transition period, these non-resident taxpayers will no longer be able to benefit from the “De Ruyter” case-law or its consequences.
Indeed, in line with the “De Ruyter” case law, requests for relief from social contributions had been made by non-residents affiliated to a social security scheme in “third countries”. However, unlike those members of a European social security scheme, the requests were rejected by the French Tax Authorities.
Faced with this refusal by the Administration to grant the reliefs and the Administrative Courts, having confirmed these rejections, the French “Conseil constitutionnel” was required to consider a grave constitutional issue on the basis of the non-conformity of this difference in treatment with the principles of equality in French law.. However, by their decision of December 15th, 2016 (CE QPC, 15-12-2016, n°401716), the “Conseil” ruled that article L. 136-6, I-e of the Social Security Code was in accordance with the French Constitution.
On this same issue, the European Union Court of Justice considered for its part in a judgment “Jahin” of January 18th, 2018 (EUCJ, January 18th, 2018, case C 45-17) that this difference in treatment was not contrary to European regulations.
Therefore, after the transition period which ends on December 31st, 2020, those individuals, resident in the United Kingdom, but in receipt of French sourced capital and investment incomes will no longer benefit from the reduced rate of 7.5%, but will have to pay all social contributions at a rate of 17.2%…
By Maître Cédric RIVIERE, tax Lawyer in Périgueux (Dordogne, France) – firstname.lastname@example.org – +33 (0)220.127.116.11.09.