The European Commission is squaring up for a major row with France over its residential property rules. The EC has formally asked France to amend its tax provisions which allow investments in new residential property situated in France to benefit from accelerated depreciation, but do not allow the same for similar investments abroad.

The Commission considers such provisions to be incompatible with the free movement of capital, a fundamental principle of the EU’s Single Market. The request takes the form of a Reasoned Opinion (the second step of an infringement procedure). In the absence of a satisfactory response within two months the Commission may refer France to the European Court of Justice.

The problem is that the French tax provisions allow accelerated depreciation to be applied to new residential property in France which is intended for letting over a minimum period of 9 years. This results in favourable tax treatment for these investments. By contrast, a French taxpayer who invests in residential property to let in another Member State or an EEA country cannot benefit from accelerated depreciation, and hence cannot enjoy these tax benefits.

Such provisions are incompatible with the free movement of capital as guaranteed by Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the EEA Agreement says the commission, because they discourage resident taxpayers from investing in overseas property.

In a similar case, the EU’s Court of Justice (C-35/08, Busley from 15 October 2009) has confirmed that such discriminatory tax treatment is in breach of EU rules on the free movement of capital.