Under the Loi Malraux, a tax reduction is available for the restoration of residential (and commercial) property located in designated conservation areas.

The amount of the reduction is either 22% or 30% of the costs of the works, depending on the conservation status of the area.

The maximum cost of the works is €400,000 over a period of 4 consecutive years.

As a condition of receiving the tax relief, the owner is obliged to rent the property unfurnished for a period of at least 9 years, to a tenant(s) who must occupy the property as their principal residence.

However, under Article 199l of the Code général des impôts, the relief is only available to those who are tax resident in France.

In a recent case heard in a local court sitting in Paris, a tax resident of Germany applied for tax relief for €100,000 spent on restoration work carried out on a property in a protected area.

His claim was refused by the local tax office, as he was not tax resident in France.

This refusal was challenged in court on the grounds that it was contrary to the Treaty on European Union, which enshrines the free movement of capital between Member States.

Article 63 of the Treaty states: "Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited."

Nevertheless, under Article 65 of the Treaty Member States can discriminate between residents and non-residents, provided their circumstances are not objectively comparable or can be justified by an overriding reason in the public interest.

Article 65 of the Treaty states that Member States have: "the right to ... apply the relevant provisions of their tax legislation which distinguish between taxpayers who are not in the same situation as regards their residence or the place where their capital is invested;....... The measures and procedures referred to ........ shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63."

Thus, the fact that a non-resident does not benefit from certain tax advantages which are granted to the resident is not, as a general rule, discriminatory, due to the objective differences between them. This is the case, for instance, in relation to income tax, where residents are taxed on a progressive scale, but non-residents on a fixed rate.

However, the difference in tax treatment may be regarded as discriminatory if, notwithstanding their residence in different countries, they in a comparable situation.

In reviewing this case the court concluded that:

"In the light of the purpose and content of those provisions, the situation of non-residents who incur expenses satisfying the conditions laid down by law is comparable to that of residents. It is not established,….. that the restriction thus imposed on the free movement of capital is compelling in the public interest. Consequently, the provisions of Article 199l of the General Tax Code are contrary to the free movement of capital in so far as they limit the benefit of the tax reduction which they provide for taxpayers domiciled in France."

This is a significant ruling, which could well have implications for similar tax reductions which are restricted to residents, such as those under 'Pinel' and 'Denormandie', two other housing investment schemes. It remains to be seen whether there are further similar cases in the courts, and the response of the government.

 

Although the court accepted in this case that the plaintiff had the right to the tax relief, because they had failed to comply with the proper procedures granting that right, their application was rejected.