You will also have to pay income tax if you live permanently in France or earn an income from a property there.
France is one of the highest taxed countries in the European Union when income tax, social security contributions, VAT (TVA) at 19.6 per cent and other indirect taxes are taken into consideration.
Before you decide to settle in France permanently, you should obtain expert advice regarding French taxes. This will (hopefully) ensure that you take maximum advantage of your current tax status and that you don’t make any mistakes that you will regret later.
As you would expect in a country with millions of bureaucrats, the French tax system is inordinately complicated and most French people don’t understand it. It’s difficult to obtain accurate information from the tax authorities and, just when you think you have it cracked, (ho! ho!) the authorities change the rules or hit you with a new tax.
Taxes are levied at both national and local levels, although even ‘national’ taxes such as income tax are usually calculated and paid locally. (It’s even possible to meet your tax man, if you should so wish!) There’s a five-year statute of limitations on the collection of back taxes in France: i.e. if no action has been taken during this period to collect unpaid tax, it cannot be collected. Late payment of any tax bill usually incurs a surcharge of 10 per cent.
Income Tax
Personal income tax (impôt sur le revenu des personnes physiques/IRPP) in France is below average for EU countries, particularly for large families, and accounts for some 20 per cent of government revenue only. The government has been reducing income tax levels for the past decade; on the other hand, social security contributions are constantly increasing, which means that average net income is a mere 50 per cent of gross salary.
Employees’ income tax isn’t deducted at source by employers in France (although the government is considering introducing such a system, in line with those of other EU countries), and individuals are responsible for declaring and paying their own income tax. Most taxpayers pay their tax a year in arrears in three instalments, although it can be paid in ten monthly instalments.
Tax is withheld at flat rates and at source only for non-residents who receive income from employment and professional activities in France; they must file a statement with the Centre des Impôts des Non-Résidents (9 rue d’Uzès, 75094 Paris Cedex 02, 01 44 76 18 00) each year.
Families are taxed as a single entity, although you can elect for a dependent child’s income to be taxed separately if this is advantageous (a dependant’s income up to a certain amount is exempt from income tax). The French income tax system favours the family, as the amount of income tax paid is directly related to the number of dependent children. French tax rates are based on a system of coefficients or ‘parts’ (parts), reflecting the family status of the taxpayer and the number of dependent children. The number of parts is known as the quotient familial (QF).
French law distinguishes between living with someone on an ‘unofficial’ basis (en union libre) and cohabiting with a spouse or ‘official’ partner (en concubinage). A partner can be made ‘official’ by entering into an agreement called a pacte civil de solidarité (PACS). If you live en union libre, you’re treated for tax purposes as two single people, whereas if you live en concubinage, you’re treated as a couple and are entitled to a number of tax advantages.
Accurate Information
It’s difficult to obtain accurate information from the tax authorities, and errors in tax assessments are commonplace. Unless your tax affairs are simple, it’s prudent to employ an accountant (expert comptable) to complete your tax return and ensure that you’re correctly assessed. In fact, a good accountant will help you (legally) to save more in taxes than you will pay him in fees.
The information below applies only to personal income tax (Impôt sur le Revenu des Personnes physiques/IRPP) and not to company tax. Income tax is calculated upon both earned income (impôt sur le revenu) and unearned income (impôt des revenus de capitaux).
Many books are available to help you understand and save taxes, and income tax guides are published each January, including the Guide Pratique du Contribuable. The Service Public website (http://www.service-public.fr ) also has extensive tax information under ‘Impôts’. If your French isn’t up to deciphering tax terminology, refer to Taxation in France by Charles Parkinson (PKF Publications). A list of registered tax consultants is available from the Conseil Supérieur de l’Ordre des Experts-Comptables ( 01 44 15 60 00, http://www.experts-comptables.fr ). Details of Franco-British tax consultants are available from the Franco-British Chamber of Commerce in Paris ( 01 53 30 81 30, http://www.francobritishchamber.com ).
Liability
Your liability for French taxes depends on where you’re domiciled. Your domicile is normally the country you regard as your permanent home and where you live most of the year. A foreigner working in France for a French company who has taken up residence in France and has no income tax liability abroad is considered to have his tax domicile (domicile fiscal) in France. A person can be resident in more than one country at any given time, but can be domiciled only in one country. The domicile of a married woman isn’t necessarily the same as her husband’s but is determined using the same criteria as for anyone capable of having an independent domicile. Your country of domicile is particularly important regarding inheritance tax.
Under the French tax code, domicile is decided under the ‘tax home test’ (foyer fiscal) or the 183-day rule. You’re considered to be a French resident and liable to French tax if any of the following applies:
- Your permanent home, i.e. family or principal residence, is in France.
- You spend over 183 days in France during any calendar year.
- You carry out paid professional activities or employment in France, except when secondary to business activities conducted in another country.
- Your centre of economic interest, e.g. investments or business, is in France.
If you intend to live permanently in France, you should notify the tax authorities in your present country (you will be asked to complete a form, e.g. a form P85 in the UK). You may be entitled to a tax refund if you depart during the tax year. The tax authorities may require evidence that you’re leaving the country, e.g. evidence of a job in France or of having bought or rented a property there. If you move to France to take up a job or start a business, you must register with the local tax authorities (Centre des Impôts) soon after your arrival.
Double Taxation
French residents are taxed on their world-wide income, subject to certain treaty exceptions (non-residents are taxed only on income arising in France). Citizens of most countries are exempt from paying taxes in their home country when they spend a minimum period abroad, e.g. a year. According to the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, France has double-taxation treaties with over 70 countries, including all members of the EU, Australia, Canada, China, India, Israel, Jamaica, Japan, New Zealand, Norway, Pakistan, the Philippines, Singapore, Sri Lanka, Switzerland and the US.
Treaties are designed to ensure that income that has already been taxed in one treaty country isn’t taxed again in another treaty country. The treaty establishes a tax credit or exemption on certain kinds of income, either in the country of residence or the country where the income is earned. Where applicable, a double-taxation treaty prevails over domestic law. Many people living abroad switch their investments to offshore holdings to try to circumvent the often complicated double-taxation agreements, but this may no longer be possible. If you’re in doubt about your tax liability in your home country, contact your nearest embassy or consulate in France. The US is the only country that taxes its non-resident citizens on income earned abroad, although there are exclusions on foreign-earned income (around $76,000 per spouse).
UK citizens resident in France should note that a new British-French double-taxation treaty made in January 2004 and expected to come into force in 2008 will affect the taxation of non-French property in certain cases. Whereas UK citizens resident in France are currently exempt – in both France and the UK – from capital gains tax (CGT) on the sale of UK property (owing to a legal anomaly), they will be liable for French CGT under the new rules.
UK property-owners resident in France should therefore consider selling their UK property before the new rules come into effect, unless they will have owned it for more than 15 years, in which case they may be exempt from French tax anyway. The new treaty will, on the other hand, exempt property owned by UK citizens resident in France from liability for wealth tax for the first five years of their residence. The new treaty also impinges on the taxation of UK companies conducting business in France. For details, refer to a specialised international tax consultancy service such as Blevins Franks ( 020-7015 2126, http://www.blevinsfranks.com ).
Leaving France
Before leaving France, foreigners must pay any tax due for the previous year and the year of departure by applying for a tax clearance (quitus fiscal). A tax return must be filed prior to departure and should include your income and deductions from 1st January of the departure year up to the date of departure. The local tax inspector will calculate the tax due and provide a written statement. When departure is made before 31st December, the previous year’s taxes are applied. If this results in overpayment, a claim must be made for a refund. A French removal company isn’t supposed to export your household belongings without a ‘tax clearance statement’ (bordereau de situation) from the tax authorities stating that all taxes have been paid.
Leaving (as well as moving to) France may offer you an opportunity for ‘favourable tax planning’ (i.e. tax avoidance rather than tax evasion). To take the maximum advantage of your situation, you should obtain professional advice from a tax adviser who is familiar with both the French tax system and that of your present or future country of residence.
This article is an extract from Buying a home in France. Click here to get a copy now.