French Tax Bulletin - Part II

PKF (Guernsey) Ltd provide a further update on French tax developments and practical issues.

Changes to the France-UK Double Tax Treaty

The double tax treaty between France and the UK that was signed on 28 January 2004 will not now be presented to Parliament as, following consultations, a new version was signed on 19 June 2008.  This treaty will need to be ratified to enter into force. No date for this has been published yet, but the revived project may imply a speeding up in the process. Below is a summary of the main changes which will affect British citizens living in France.

Scope of the DTT:  The Contribution Sociale Généralisée and Contribution au Remboursement de la Dette Sociale as well as the additional taxes to French corporation tax are clearly included in the scope of the agreement.

The term “resident of a contracting state” where the State is France, now expressly includes partnerships or other groups of persons which are not liable to French corporation tax and have their seat of effective management in France.

Rental income:  The article dealing with this type of income now specifically includes shares or other rights in a company or other legal entities (partnerships, trusts etc), which give an entitlement to enjoy immovable property situated in a contracting state.  The latter is allowed to tax such income under the terms of the DTT, subject to the terms of the specific articles dealing with business profits and independent professional services.

The articles concerning the payment of dividends, interest or royalties and other income now include a general clause of nullity against any abusive use of the rules they establish, i.e. if it was the main purposes or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights/debt-claim/right or property in respect of which the dividend/interest/royalties is paid to take advantage of the Article by means of this creation or assignment.

Capital gains on the sale of real estate:  If the underlying assets of trusts and partnerships consist principally of immovable property, the gain arising from the disposal of any interest in such entities may be taxed in the country in which the real estate is situated.

The current loophole which may apply under specific circumstances to a limited company owning French real estate (so long as it has not got a fixed establishment in France) is closed under the new treaty.

Capital Gains Tax realised on UK properties by a resident of France:  The current treaty contains a loophole which leads to the double exemption of any gains arising on the sale of a UK property in the hands of individuals with a non-UK resident and not ordinarily resident status provided that the taxpayer does not move back to the UK within 5 years of leaving.  This loophole will cease under the new treaty through a clause, which states that in the case of France, France may tax the gain.  Any double taxation will be eliminated by a tax credit equal to the amount of tax paid in the UK on that gain.  As there is no UK liability in this context, there will be no tax credit against the French tax liability.  This means that from the date the new treaty enters into force, any gain realised on the sale of a UK property by a resident of France will be assessed and taxed according to the French capital gains tax rules.

Wealth tax:  Residents of France for tax purposes are exposed to French wealth tax on the net value of their worldwide assets, including the value of any real estate or rights in real estate outside France.  The new agreement would exclude non-French assets from the wealth tax computations for five years following the permanent move to France.  This would only concern UK nationals who are not also French nationals.  If the taxpayers leave France and provided they remain outside France for at least three years, the five-year exemption applicable to non-French situs assets would apply once more.  The temporary exemption will only benefit individuals who move to France after the treaty enters into force.

The text of the new treaty is available at http://www.hmrc.gov.uk/international/france.pdf

Capital Gains Tax Exemption on the Sale of Principal Private Residence

If you are about to sell your French home but have lived in France without being properly registered under the French tax system, you risk being refused the principal private residence exemption.  Indeed without the up-to-date filing of your French income tax returns declaring your worldwide income, you will not be registered under the French system and the authorities will simply tax the net gains as if you were resident outside France at rates of 16% (for residents of the EEA) or 33.33%.

Cases handled in the past have shown that attempts to bring the situation up to date before the sale may be fruitless if the first stages of the sale have taken place (the signing of a compromis de vente, for instance).  Nevertheless, if a person is exposed to double standards in terms of taxation, that is to say treated as resident for income tax purposes and as non-resident for capital gains tax purposes, they should be able to claim against one or the other form of tax (depending on the evidence available).  As this type of case is likely to go before the cour administrative, which is a lengthy and costly process, anyone susceptible to find himself in this situation is strongly advised to regularise their situation as soon as possible.

In France the onus is on the taxpayers to obtain and file their tax returns.  Once the first return has been processed, the person is duly registered and should receive a pre-identified tax return every year. 

Unfortunately, it appears that a great deal of well meaning expatriates have been wrongly advised by none other than their local tax offices.  Some even seem to state that the receipt of foreign source income simply dispenses the recipient from filing a resident tax return.  This is simply not true.

Taxation on Notional Income Basis applicable to Residents of Territories which have not signed a Double Taxation Agreement with France

Residents of non-double tax treaty partner territories with France are liable to French income tax on a notional income calculated as three times the annual unfurnished rental value of the French property(ies).  The tax applies even if the property is not rented out.

If the property is occupied by tenants part or all of the year the taxable base may be reduced or simply cancelled.  Nevertheless the requirement to file an income tax return remains and the authorities are likely to demand evidence of the rentals.

There is a possibility of exemption from tax if the following conditions are fulfilled:

a) You are a national of a double tax treaty partner country, and

b) You can prove that your personal income tax liability in the country where you reside is at least two-thirds of what it would have been if you were registered as a French taxpayer.  To establish the position, you need to report your worldwide sources of income and calculate the French income tax liability as if you were a full time resident of France.  We recently had confirmation from the French authorities that the social surcharges (CSG, CRDS and PS) mentioned in the previous part of this bulletin, must be included for the purpose of comparing the tax burdens in both jurisdictions. As these represent an extra French tax burden of around 11% on French residents, it clearly reduces the application scope of the exemption.  This is a complex exercise and its worth is unknown before the full calculation is completed.  In addition it has to be done for each tax year.  Failure to file the relevant returns leads to penalties and assessment in arrears (3 years).  The filing date for the relevant return is 30 June every year.

Article Added Friday, 17 October 2008

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