Written by Virginie Deflassieux - PKF (Channel Islands) Limited Associate Director - French Tax Services

1. Income Tax

1.1 General

French income tax applies on a worldwide income basis to individuals who reside in France. Non residents are generally only exposed to French tax on any French source income they receive. Tax relief in respect of French tax paid can usually be claimed if there is a double tax treaty with your country of residence. It is important to remember that residence is not a question of choice but fact. In the absence of any return, the French authorities are able to assess up to three years in arrears, often leading to tax penalties and interest charges. Voluntary filing of any outstanding French tax returns is always recommended as the taxpayer tends to be treated more leniently.

The new France-UK double tax treaty, which entered into force in 2010, offers good protection from any double taxation. For details of the changes which affect UK or French source income under the new treaty please visit www.pkfci.com - French Tax/ Publications - to download the full update.

The most common French source income received by non-French residents is rental income. In accordance with the terms of most double tax treaties signed with France, this type of income is taxable in France even if received abroad, in sterling, by non French resident clients. It requires the filing of a non-resident French income tax return (Form 2042), at the non-residents tax office in Noisy-le-Grand before 30 June in the following year (for EU residents). The furnished letting activity must be registered at the local tax office where the property is situated, and the taxpayer is issued with a SIRET registration number which must be stated on his income tax form.

Individuals who simply own a second home in France and do not receive any French source income do not normally need to file a non-resident income tax return except if they reside in a country that has not signed a double tax treaty with France, such as the Channel Islands, Isle of Man, Andorra, Gibraltar, Caribbean Islands etc. Under Article 164c of the Code Général des Impôts, these French home owners are exposed to French tax on a notional income basis calculated as three times the annual unfurnished rental value of their French property. The presence of a Tax Information Exchange Agreement “TIEA” with France, sadly, does not offer any protection against this tax provision. Here again, the onus is on the taxpayer to file the relevant form within the requisite deadline. Please visit www.pkfci.com - French Tax/Publications/ French Tax Issues for Residents of Territories with no Double Tax Treaty with France - to download the full update for these particular territories. For some jurisdictions, the recent TIEAs may well be the first step to full double tax treaties in the next few years.

1.2 Income Tax Rates

The minimum income tax rate for non-residents is 20%. French residents and individuals assessed on a notional basis (i.e. residents of the non double tax treaty partner territories listed above) are subject to the following rates of income tax:

2011 French income tax scale and rates (barème) applicable to income received in 2011
(This remains unchanged and is the same as the 2011 scale applicable to 2010 income)

Note: The French system taxes on a household basis. Each household has a set number of family shares depending on the marital status, number of dependants, etc: a married couple is entitled to 2 shares, an extra half a share is granted for the first two children, and a full share per child thereafter.

Before applying the above scale rates, the total household’s taxable income is divided by the number of family shares. The resulting tax liability is then multiplied by the number of shares to obtain the final liability of the household. The benefit of the nil and lower rate bands is thus increased depending on the number of family shares.

In addition to the scale rates, the French tax system applies social surcharges to most sources of income declared by French resident taxpayers. The charges are known as contribution sociale généralisée, contribution au remboursement de la dette sociale and prélèvement social. Despite the fact that these are labelled as “social contributions” they do not entitle the payer to any health benefits and should in fact be treated as an additional charge on income.

These charges apply as follows:-

(1) Part of the CSG (currently 4.2% on pensions, 5.1% on salaries and 5.8% for other income) is deductible from the following year’s taxable income.

(2) If a pensioner is resident in France and covered under one of the French social security regimes (including the CMU), their non-French pensions are normally exposed to the CSG and CRDS. Pensions may be exempt from these charges in the hands of a pensioner eligible to continued health cover under EU forms such as S1 (previously form E121) or simply with private cover. If a foreign pension is declared as an annuity for French income tax purposes it falls under the investment income category and the CSG, CRDS and PS thus apply. From 2012, the CSG on non-French pensions or salaries will be levied by the local tax office and not the URSSAF.

(3) Investment gains are taxed on the total gain at 19% plus 13.5% of social surcharges, i.e. 32.5% in total. The former tax-free disposal limits has now been abolished.

(4) Certain employment benefits are excluded from the deduction and thus suffer the CSG and CRDS on the full amount.

(5) There are specific charges applicable on certain foreign earnings received by French taxpayers assessed under the profession libérale system.

1.3 French rental income

Furnished Rentals

Furnished rentals in France are treated as a commercial activity. Taxpayers (loueur en meublé) with furnished rental income below €32,600 are assessed under the Micro BIC regime and subject to tax after a set allowance of 50%. The Micro BIC does not require the preparation of full French accounts and is therefore favoured by non-residents. However, it is possible for the taxpayer to opt for the régime réel simplifié and deduct itemised expenses subject to filing full accounts.

There is a specific Micro BIC regime for hotel-like rental activities registered as gîtes ruraux, meublés de tourisme classés, or chambres d’hôtes with a limit €81,500 and a set deduction of 71%. More information on how to register is available on http://pkfci.com/index.php?page=53.

Since 2010 a local charge known as CET applies to most furnished letting activities. It was introduced to replace the local business tax (taxe professionnelle). The rates and minimum charges (between €203 and €2,030) vary considerably depending on the commune. Regrettably, this tax is very opaque and applies regardless of the level of profit. In some cases it is even higher than the income generated by the activity. As a result many landlords who were renting out on a low-key basis to cover their local property taxes, are likely to cease their lettings.

Unfurnished Rentals

Unfurnished rentals are taxed under the regime foncier. If the total gross rental income is below €15,000 for the tax year, it is possible to deduct a set 30% allowance in lieu of itemised expenditure. Nevertheless, in the case of mortgaged properties it is usually best to opt for the real foncier regime which allows the deduction of itemised expenses including mortgage interest. Losses may be carried forward for up to 10 years
.

2. Wealth Tax

France has one of the few remaining regimes that enforce an annual tax on the basis of net assets owned. This applies to non-residents if the net value of their French assets (excluding financial investments in France) exceeds the limit of €1.3M (as at 1 January 2011). Wealth tax applies on a worldwide basis for residents of France who arrived before 5 August 2008. Those who settled after 6 August 2008 benefit from a five year exemption on their assets situated outside France. Married couples and unmarried individuals (living together) are assessed jointly. The onus is on the taxpayer to declare the value of their assets and pay the tax. Failure to submit a wealth tax form when applicable can lead to assessments of up to ten years in arrears. Penalties for late payment are set at 10%.

The 2012 wealth tax rates are as follows:

3. Capital Gains Tax

Capital Gains Tax for non-residents is charged at 33⅓% where there is no double tax treaty with France. It is reduced to 19% for individuals living in a country which has a tax treaty with France. The method to determine the net taxable gain varies depending on individual circumstances. Individuals may apply a taper relief over the period of ownership and after five full years of ownership. From 1 February 2012, the taper relief rates are as follows: 2% between 5 and 15 years, 4% between 16 and 24 years and 8% thereafter. In practice this means that a property has to be held for 30 years at least for the gain to be totally exempt.

It is important to note that this new harsher taper relief applies from 25th August 2011 in relation to properties transferred into a family owned Société Civile Immobilière “SCI”.

The sale of shares in any property holding companies or entities holding French or foreign real estate must be reported within a month via a French notaire.

The above regime applicable to capital gains tax on second homes affects individuals with French holiday homes as well as French residents who own second homes in France or abroad.

In addition to the 19% rate on investment gains detailed above, French residents are subject to the social charges at 13.5%.

Corporation tax paying companies and trusts are subject to a different regime, with a 2% depreciation on the acquisition value which leads to an annual increase of the taxable gain.

When disposing of a French property in excess of €150,000, non-French resident individuals or entities resident must appoint a fiscal representative in France to deal with their capital gains tax requirements.

4. French Inheritance and Gifts Tax Rates

Transfers by succession between spouses or members of a PACS agreement are exempt from French inheritance tax. However, lifetime gifts between spouses attract gifts tax after an allowance of €80,724:

Transfers (though lifetime gifts or succession) between parents and children are taxed on the following sliding scale after a tax-free allowance of €159,325:

Transfers between siblings benefit from a €15,932 tax free abatement and the excess gives rise
to the charge below although under strict conditions, certain transfers between siblings can be totally exempt.

The above rates also apply to transfers to nieces and nephews who inherit in lieu of their parents, but the €15,932 tax free allowance is shared. For direct transfers to nephews and nieces the rate is 55% after a €7,967 allowance per person.

Transfers of assets to other relations up to the fourth degree are taxed at 55% after the general tax free allowance of €1,594. All other transfers, i.e. to other relatives or unrelated individuals are taxed at 60% after the same small tax-free allowance.

The gift tax allowance for lifetime gifts from a grand-parent to a grandchild is €31,865. It is fixed at €5,310 for lifetime gifts made by a great-grandparent.

For further information, assistance with the preparation of French tax returns or specific advice on the French tax implications of a permanent move to France or French property purchase and structuring please contact Virginie Deflassieux or Catherine Le Pelley at french.tax@pkfci.com, or telephone +44 1481 727927. Alternatively visit our website to request free French Tax Bulletins, www.pkfci.com or to order your copy of “Taxation in France, a Foreign Perspective” a complete guide to the French tax system.
 

Taxation in France

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Taxation in France: A Foreign Perspective