French Income Tax and Being Tax Resident in France

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French Income Tax and Being Tax Resident in France

Becoming a Tax Resident of France

Under French domestic rules, a person becomes French tax resident from the day they arrive in France if they intend their stay to be permanent or indefinite. Otherwise it will be from whatever other point they can be viewed as having commenced residence where at least one of the four following tests is fulfilled:

1. France is where the main residence or home is (foyer). This embraces ideas of permanence and stability and ignores temporary absences, and is the rule the French authorities will most rely on. If a spouse and children live in France a person will also probably be considered French tax resident even if they work abroad.
2. France is the principal place of abode (lieu de séjour principal). This usually means more than 183 days in France in a calendar year. It does not have to be a continuous period of 183 days; this is a cumulative rule assessed over a French tax year (1 January to 31 December) and includes part days.
   Even if a foreigner spends less than 183 days in France, they may be tax resident if they have spent more time in France than in any other country.
3. A person's principal activity is in France, for example, their occupation is in France (whether salaried or not); or their main income arises in France (whether salaried or not), unless they can show that such activity is purely incidental (à titre accessoire).
4. France is the country of a person's most substantial assets (centre of economic interests). This means if France is the place of principal investments, or where assets are administered, or from where a larger part of income is drawn.

Note in particular that an individual does not have a choice; they either are, or are not, a French tax resident under the rules.

If a person is also simultaneously tax resident under the domestic rules of another country, then in order to come to a decision it will be necessary to look at the "tie-breaker" rules in the double tax treaty between the two countries, if one exists. These normally follow a particular pattern.

Taxable Income

A person who is tax resident in France is liable to pay tax on their worldwide income (impot sur le revenu).

Some income, such as earnings, pensions, rental income and some other forms of investment income is taxed at progressive scale rates that range from 0 percent to a top rate of 41 percent. There is also a fixed rate of income tax at source on bond or bank interest (at 24% from 2012) and on capital gains (19% from 2012), and 21% on dividends.  By election these rates can be applied to interest and dividends, say, from other EU countries (see below).  Social charges of 13.5% are added to these rates.

Income Tax Scale Rates for 2011 tax returns based on 2010 Income

As part of France’s austerity measures, a surcharge is being imposed on high incomes for income received in 2011 and 2012 as follows:

• income between €250,000 and €500,000 – 3%
• income over €500,000 – 4%

The taxable income to be assessed is the total income of the household. To avoid the higher rates of tax where there is a high income, but more than one household member, the family is divided into a number of parts familiales.

The total income is divided by the number of parts. The income tax scale rates are then applied to this lower figure, and having computed the income tax due, it is multiplied back up by the number of parts.

The income of a married or PACS couple (the French version of civil partnership, but open to both same and opposite sex couples) would be divided into two parts, with an additional half part for each of the first and second children, and a whole part for the third and each subsequent child. There is a maximum benefit that a household can receive from this system.

Employment Income

A person who is employed in France, unless they are not resident, will be paid net of social security contributions only. No income tax will be deducted at source from their income. It is therefore the individual's responsibility to ensure that they retain sufficient funds to pay their tax liability when this falls due.

Self-employment income

Self-employment income is taxed in France under one of two regimes (barring agricultural income):

• the BNC (Bénéfices Non Commerciaux) regime
• the BIC (Bénéfices Industriels et Commerciaux) regime

Traditionally the earnings of lawyers, doctors, architects, accountants and office holders such as notaries plus other non-commercial self-employed activities are taxable as BNC. More commercial activities are taxed as BIC.

BNC (Bénéfices Non Commerciaux)

The BNC regime applies to all forms of non-commercial income. Accounts are prepared on a "revenue" or "cash" basis; that is income received or expenses paid for within the tax year are taken into account.

If the gross annual income is below €32,600, it will usually be assessed under the Micro-BNC regime which allows the taxpayer to deduct a flat 34 percent for expenses, so that only 66 percent of the gross income is taxable.

Where the annual income exceeds the above threshold, or the taxpayer opts out of the Micro regime, they will be taxed under a regime whereby the actual income net of expenses of the business is taxed.

BIC (Bénéfices Industriels et Commerciaux)

This regime applies to commercial and more traditional trading income as well as income from furnished lettings. Any income or expenditure relevant to the tax year is included.

Where gross annual income is below €32,600 the simplified Micro-BIC regime can apply, which will allow a flat 50 percent deduction, which means that only 50 percent of the income is taxable.

For the sale of goods, or the provision of gîtes or chambers d’hôtes style rental accommodation, a more generous Micro-BIC applies, whereby if gross income is less than €81,500 a flat 71 percent of income is deducted leaving only 29 percent to be taxed..

If the turnover exceeds the above thresholds, a taxpayer will automatically fall within the income and expenditure method of calculation known as the Régime Réel Simplifie (RRS).

There is also the Régime Réel Normal, but this usually only applies to businesses whose annual turnover is more than €763,000.

Auto Entreprenuer

Those assessed under the simplified Micro deduction regimes (including for furnished rental income) may elect to pay their income tax, social charges and social security contributions at source. This would then be the final liability on this income.

The income tax at source (known as the Micro-Fiscal), calculated by reference to the turnover (with no deductions) is:

• 1% on trading activities and furnished lettings
• 1.7% for all other services
• 2.2% for non-commercial profits

The social security contributions and social charges (known as the Micro-Social) are also calculated by reference to the gross turnover and are:

• 12% on trading activities and hotel-like rentals
• 21.3% on services of a commercial nature and general furnished lettings
• 18.3% on professional services

Bank Interest

French bank interest is subject to a fixed withholding tax of 24 percent (from 2012), plus 13.5% social charges. Bank interest received from an account in an EU country can also effectively receive the same treatment, but in order to achieve this, the taxpayer must complete Form 2778-SD each time interest is paid and pay over the tax (and social charges) to his tax office. Otherwise, where no election is made, the usual scale rates will apply via the normal tax return system.

Dividends

Dividends are subject to a final and fixed withholding tax rate of 21 percent applied to the gross dividend with no deductions or abatements, although if paid by a company within the EU the usual scale rates can apply after a series of complex deductions and abatements which can be quite generous.

Pensions

Pensions are taxed in France at the progressive scale rates. The taxable base consists of income net of social security contributions (if any), less a 10 percent deduction of a minimum of €374 and a maximum of €3,660 per household per year (for 2011).

UK government service pensions remain taxable in the UK and are not taxed in France, although the income needs to be declared and is taken into account for the purposes of determining the rate of tax payable on your other French source income.

Annuities and QROPS can receive more beneficial treatment but you need to seek personal advice.

From January 2011 lump sums received from pension funds are taxable in France. To avoid the amount of the lump sum taking people into the next income tax band, where the lump sum is paid as a lump sum, it exceeds €6,000, and the contributions to the fund were 100% tax-deductible on the way into the fund, a relief can be claimed - it is not given automatically.

If the relevant conditions are met, then one fifteenth of the taxable lump sum is added to your other taxable income in the year of receipt. The additional tax so calculated is then multiplied by fifteen to produce the total tax liability on the lump sum (fifteen years being the average life expectancy from retirement).  This form of relief can avoid the lump sum falling into the higher rate bands.

Rental Income

Rental income from a French property is always taxable in France, regardless of where the money is paid to the property owner or where they live.

For French residents, the income is added to other income and taxed at the progressive scale rates of income tax. Taxable rental income is calculated under two regimes in France: Revenus Fonciers, applicable to income from land and unfurnished lettings; and BIC (as above) to income from furnished lettings.

Where the gross rental income from furnished lettings is less than €81,500 (from 1 January 2011) the taxable income may be calculated under the Micro-BIC regime (as above).

In 2011, the limits and discounts are:

• €81,500 for sale of goods/food etc (for consumption on or off the premises) and for gîtes and chambres d’hôte rental income  - discount  71%
• €32,600 for other furnished lettings - discount 50%
• €32,600 for other commercial services - discount 50%

No expenses need be demonstrated, no accounts are required and no separate tax forms for the business need be prepared.

The Micro-Foncier regime can similarly apply to unfurnished lettings. It is similar to the Micro-BIC regime, but the thresholds and percentages are different. Where total gross income from unfurnished lettings is below €15,000 per year, a flat 30 percent can be deducted as expenses. The remaining 70 percent of the gross rental income from the unfurnished lettings will be taxable in France.

If the turnover exceeds the above thresholds, the taxpayer will automatically fall within the income and expenditure method of calculation, the Régime Réel Simplifie (RRS). Under this method, actual expenditure related to the letting of the property is tax-deductible. Improvement costs related to rebuilding or expanding a property are tax deductible for capital gains tax purposes only.

A property owner can register as a professional furnished landlord (loueur en meublé professionnel, LMP) and be automatically registered with the various social security and health organisations and be in the mainstream system for self-employed. They will be taxed under the standard BIC regime. To register, a landlord must have a turnover in excess of €23,000 per year and the furnished rental activity must represent at least 50 percent of their total income to claim this treatment.

However, being registered as LMP will trigger a liability to the new CET tax (Contribution Economique Territoriale) which replaced the taxe professionnelle in 2010.  It will also expose the income to social security (although this will entitle the payee to French state healthcare and a proportion of the French state retirement pension when they reach the appropriate age).

Other Payments to be Made from Income

Social Charges

Social charges are an additional tax levied on income and capital gains. They are effectively another form of income tax in France, payable on all forms of income (including capital gains) received by French residents, including pension income.

Social charges are calculated based on the income declared in your tax return. The French authorities will send notification (avis d'imposition) of the amount payable in the autumn following the submission of your tax return.

Social charges are made up of four elements:

1. CSG (Contribution sociale généralisée)
2. CRDS (Contribution au remboursement de la dette sociale)
3. PS (Prélèvement Sociale Contribution additionelle)
4. RSA (Revenu de solidarité active)

The amounts are different for each type of income, and the position can be summarised as:

A proportion (approximately half) of social charges payable may be tax-deductible, but it depends on the type of income. Social charges on income taxed at the fixed rates are not tax deductible at all, whereas those paid on income taxed at the progressive scale rates are tax-deductible.

An EU national may be exempt from paying French social charges on pension income derived from schemes in their original country if they hold Form S1 for healthcare purposes.

Social security contributions

A person working in France, as an employee or self-employed, must be registered with the social security organisation (caisse) which covers their particular occupation and pay social security contributions (cotisations).

How much they pay depends on what they earn. There are various ceilings, but, as a guideline, a typical cotisation on salary of say €30,000 would be around 13 percent pension, health and family allowances before the other "social charges" (CSG and CRDS) which would add another 8% percent on top of income tax. It can be a lot higher.

The employer also makes substantial contributions that can reach 40 or 50 percent.

For a self-employed person, the basic procedure is the same but it is their responsibility to get themselves into the system. A typical cotisation might amount to 22 or 23 percent before the CSG and CRDS. There are usually more allowable expenses in reaching a taxable figure for the self-employed and the total percentage is a lot less than paid by an employer and employee combined.

Healthcare contributions

A person not covered by EU Form S1 and not working in France, may be able to access the French state healthcare system by paying 8 percent of their net taxable income to the system known as CMU (Couverture Maladie Universelle).

However, CMU contributions can now only be paid by French nationals or long-term residents of five years or more, or non-nationals who were already resident in France and affiliated to the CMU at 23 November 2007. All others now must insure privately for healthcare.

• For more information see AngloINFO INFOrmation Page, French Health Insurance

Deductions on French Tax

Deducted from gross income before tax is calculated are:

• A 10 percent deduction in lieu of expenses related to the employment (minimum deduction €421; maximum €14,157 per individual)
• Social security contributions
• Interest on certain loans used to buy into a business
• Pension contributions up to about €38,000
• Luncheon vouchers and holiday vouchers - up to fairly low limits
• The income from profit-sharing schemes is generally exempt from income tax - but not from social contributions

Allowance for over 65s and the disabled

Individuals over the age of 65 or who are registered disabled and of modest means are entitled to a tax-free allowance of €2,311 (for 2011) where their total household income  is up to €14,220 and €1,156 for income of between €14,220 and €22,930. The allowances double for a married or PACS couple where both fulfil the conditions.

Tax rebates

If the tax due is less than €878 for 2011 income the tax office issues a credit known as the Décote.

The Décote is half the difference between €878 and the tax due. This amount is then deducted from the tax bill. If a taxpayer's eventual liability, after calculating the Décote, is less than €61, the tax is not collected - this is the Franchise.

Tax credits

Various tax credits are available. They are not deductible against the gross or net income, but deductible against the actual tax.

Certain of the tax credits are given on a cumulative basis, and the maximum credit that can be received from 2012 is €18,000 plus 4% of the global net taxable income of the household (before the scale rates are applied).

These restricted tax credits include:

• The tax credit on dividends
• The tax credit for energy-saving work carried out on the main residence
• The tax credit for purchase of an environmentally friendly car
• The tax credit for the employment of home help
• The tax credit for child minding expenses
• The tax credit for filing tax returns electronically and paying tax by direct debit or electronically
• The tax credit for mortgage interest

Procedure for Tax Payments

When a person becomes a tax resident, it is their responsibility to make themselves known to the French tax authorities and to fully declare their income, capital gains and wealth. Married couples or couples allied under a PACS complete joint tax returns.

Income tax returns and payment dates

Income tax is paid in the year after the income is earned. So for 2011 income the tax is paid in 2012. The tax can be paid either in three equal instalments or by ten monthly instalments from January to October in the following year, i.e. payments for 2011 tax are made in 2012. Unless the taxpayer opts for monthly payments, they must make payments on 15 February and 15 May, each equal to one third of the amount of the previous year's total income tax. The final payment is due after the actual assessment is received (normally in the late summer/early autumn) for payment by 15 September.

The normal tax return filing deadline is 31 May following the end of the tax year but this can be extended in certain circumstances and for online payments.

• See AngloINFO INFOrmation Page, Paying Taxes in France: Tax Payment Deadlines

Key Dates 2012

• 15 February: Payment of first instalment towards 2011 income tax
• 15 May: Payment of 2nd instalment towards 2011 income tax
• 31 May: Deadline for filing resident 2011 income tax returns (2011 income) for individuals and SCIs.  May be extended by agreement with the local tax office or if the return is filed electronically
• 15 June: Deadline for filing 2011 Wealth Tax returns for French residents (unless wealth is below €3m, in which case it is included on income tax return)
• 30 June: Deadline for filing non-resident 2011 income tax returns for residents of Europe, Littoral Mediterranean, North America, Africa
• 15 July: As above for residents of all other countries
• 15 July: Filing of non-resident Wealth Tax returns for residents of Europe, Littoral Mediterranean, North America, Africa (unless wealth is below €3m, in which case it is included on income tax return)
• 31 August: As above for residents of all other countries
• 15 September: Income tax, CSG & CRDS demands - payment/repayment of balance of 2011 French income tax
• October/November: Payment of local taxe foncière and taxe d'habitation for 2012

Further Information

The French tax authorities (Direction Générale des Impôts) published a brochure in English which explains all French taxation due by residents of France.

• Government document last updated 31 August 2009: Click here (PDF)

The tax rates, scope and reliefs may change.  Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.