Although many UK owners of French property opt to pay income tax in the UK, this does not mean that they can avoid French taxation altogether. Principally these taxes are:

• land tax (taxe fonciere)
• community tax (taxe d’habitation)
• capital gains tax (régime des plus-values des particuliers).

And, under certain circumstances, you may also be liable for:

• inheritance tax (droits de succession)
• gift tax (droits de donation).

REGISTRATION

The ownership of all French property must be registered with the French tax authorities. Owners who are not residents have to register by 30 April following completion of the property purchase. Residents are expected to register immediately with the local tax office (Centre des Impôts). Non-resident owners should register with the tax centre for non-residents at:

Centre des Impôts des Non-residents
9 Rue d’Uzes
75094 Paris

DOMICILE

For tax purposes the concept of domicile is important in Europe, as certain domiciles have been seen as offering very favourable tax regimes. These include the Isle of Man, Jersey, Liechtenstein and Monaco. However, to be domiciled in these countries (unless you are native) is exclusive to the very rich. The general rule is that you will pay income tax in the country in which you are deemed to be domiciled. Those domiciled outside France will only pay tax on the portion of their personal income earned within the country. You will be said to have a French fiscal domicile if:

• You have a home in France and you spend more than 183 days in the country within any financial year.
• Your wife and family live in France for more than 183 days in any financial year.
• You work in France on either a salaried or self-employed basis, unless you can prove that your work is ancillary to your main employment. This can be a problem for those buying to let in France, particularly for those who no longer have any regular employment elsewhere. Fortunately, ‘employment’ can be deemed to include receiving a pension in the UK and/or other benefits or allowances.
• Most of your income is generated in France. This could for instance catch retired people who run a gîte business which generates a greater income than their UK pensions.

The concept of domicile is critical. The French authorities, naturally, wish to burden you with as much tax as possible. This is best avoided in anticipation by being clear about your own position and discussing it with the French tax authorities before submitting your first return.

INCOME TAX

If you are domiciled in France you may be liable to pay income tax.

There are some anomalies here. An occupational pension – such as that received by teachers and civil servants – will attract income tax in the UK; a personal pension, however, will attract personal income tax if you are domiciled in France.

French tax laws are complex and there will, inevitably, be winners and losers when compared with the UK tax regime. Long-term residents sometimes choose to take French citizenship because foreigners are subject to an increasingly heavy burden of personal taxation. It is also possible, even prudent, to take the view that, if you are to benefit from the French health and welfare systems, it is better to be working towards French citizenship.

There is an outline of the system below. Detailed information is available from a French government interdepartmental economic agency – Le Délégation à L’ Aménagement du Territoire et à L’ Action Régionale (DATAR). Their UK address is:

21-24 Grosvenor Place
London
SW1X 7HU
Tel : 020 7823 1895

Essentially, DATAR’s UK office is intended to offer fiscal advice to anyone considering selling in the French market-place or setting up a business in France. A letting business comes within this framework. DATAR’s publications can be obtained from:

1 Avenue Charles Floquet
75007 Paris
Tel : 00331 47 83 61 20
Fax: 00331 40 65 12 34

French income tax is assessed on a family basis. The husband is responsible for the annual return which includes the income of his wife, and children who are still in the education system, or doing national service. Divorced, separated or widowed persons claim allowances according to personal circumstances. Across the board allowances include:

• money spent on major property repairs
• money spent on ‘green’ projects such as the installation of solar panels for heating, cavity wall insulation, and double-glazing
• payments for maintenance of dependent relatives other than children
• gifts to charity
• contributions to the sécurité sociale
• approved life-insurance premiums
• interest payments on certain loans
• special arrangements for single parents with young children.

Taxable income is worked out by deducting allowances from total income and dividing the net figure by:

• a factor of one for a single person with no children
• two for a married couple with no children
• two and a half for a married couple with one child
• an extra half for each additional child (under the age of 18 or in full time education). A married couple with four children will, thus, divide by four.

When taxable income has been assessed, the rates that apply fall into a band system. The following are approximate figures for those incurring income tax liability in France in 2002. These bands, however, are subject to change and should be treated only as a rough guide:

The first € 5,666 of taxable income is tax-free.

€ 5,666 to € 6,166	–	5%
€6,166 to €7,000	–	10%
€ 7,001 to € 10,833	–	15%
€ 10,834 to € 14,000	–	20%
€ 14,001 to € 18,333	–	25%
€18,334 to €21,333	–	30%
€21,334 to €25,333	–	35%
€ 25,334 to € 41,000	–	40%
€41,001 to €58,000	–	45%
€58,001 to €67,166	–	50%
€67,167 to €77,333	–	55%
€ 77,334 upwards	–	58%

A married couple with no children, no allowances and a joint income of €41,666 would pay tax as follows (half of €41,666 is €20,833, so each has a taxable income of €20,833):

On the first € 5,666	– no tax is paid
On the next € 500 at 5%	– € 25
On the next € 833 at 10%	– € 83
On the next €3,833 at 15%	– € 575
On the next €3,166 at 20%	– € 633
On the next € 4,333 at 25%	– €1,083
On the next € 2,500 at 30%	– € 833
Total	€3,233
Their joint tax bill would be (€ 3233 × 2	€6,466

The same couple living in England would automatically have personal allowances of € 7,555 each. Their joint tax bill would therefore look like this:

First taxable income € 20,833 – € 7,555	=	€ 13,278
Tax on €13,278 at 20%	=	€ 2,656
Tax on € 10,600 at 4%	=	€ 424
Less allowance to reduce tax on €2900 at 15%	=	€ 435
Therefore, tax paid is €2,645

As the spouse is treated exactly the same, their joint tax bill would be:

(€2,645×2)

=

€5,290

The French tax system benefits large families and people on low incomes. The tax year runs from 1 January, and bills are paid in three equal instalments in the year following the liability.

Filling in a tax return is difficult because of the technical language involved. English-speaking residents paying income tax in France invariably require the services of an accountant.

When the authorities suspect that tax declarations are inaccurate or fraudulent, they investigate. In certain circumstances, residents with complex tax affairs (including perhaps income from a number of sources outside France) will be assessed according to the punitive régime de I’imposition for faiture. Under this system, income is assessed according to arbitrary norms. This includes ascribing letting value to all properties you own and multiplying it by a factor of three or five. Cars are valued and taxed at 75% of their maximum new showroom value, employees are assumed to have massive salaries, and racehorses are reckoned as winners.

LAND TAX

Taxe fonciere is levied by the local commune and is similar to the system of parish rates in the UK. Registers of all property and owners are maintained at the mairie.

Property is given a notional letting value on which the taxe foncière is based. Exceptions include government and public buildings, winepresses and stables. New buildings are exempt from tax for two years.

The last general valuation of buildings was carried out in 1974. The tax levied is adjusted annually in line with the inflation index. It is an inevitable truth that rural properties are less heavily taxed.

COMMUNITY TAX

Taxe d’habitation is paid by the resident occupier of a property on 1 January each year. It is calculated according to the value of amenities. These include the size of the property, including garages, outbuildings and land. If the property is not subject to a lease then the owner of the property is liable for the payment of tax.

This tax is reduced when the property is used as the principal residence of a family. If, therefore, you have purchased a large property to let but live in a portion of it, the tax will be reduced. Since 1989, each commune has a fixed taxe d’habitation at rates of 5, 10 or 15% of the notional letting value.

Both taxe foncière and taxe d’habitation are payable by UK residents, whether or not the property is designated as their main residence. Again rural properties suffer a lower burden of tax.

CAPITAL GAINS TAX

The régime des plus-values des particuliers is imposed on anyone who is domiciled in France when assets are sold. It is important to note, however, that their primary residence is exempt. It is generally applied to residents (domiciled else where) who sell any property in France.

The tax is levied at 33%. The capital gain is deemed to be the difference between the purchase price and the sale price, but the seller can offset:

• the supplementary costs of making the purchase, or 10% of the purchase price, whichever is the higher figure;
• an indexation of the increase in property values according to government figures.

This tax is intended to catch primarily those profiting from property dealing. French law demands that foreign sellers employ an agent to handle the sale of property. This agent (normally a notaire) is responsible for paying the tax to the government.

In practice, the capital gains tax payable on the property sale is likely to be modest or non-existent. But those who improve property considerably, or create integral residential units (such as a granny flat), could find themselves paying for the privilege.

For company-held property the tax is divided into short-and long-term gains. Short-term is defined by assets held. It also includes a portion of the revaluation of depreciable fixed assets held for less than two years. Long-term gains are the sale of assets held for more than two years. The rates are:

• short-term gains – 39%
• long-term gains – 25% for land assets and 19% for fixed assets. If a company is subject to corporation tax, this last figure is reduced to 16%.

VALUE ADDED TAX

The sale of new properties (or any sale within five years of construction) is subject to VAT (TVA). This should be included in the sale price and paid by the developer.

Property resold within that five-year period is also subject to TVA. This concerns UK buyers more than is necessary. The amount is not usually considerable because the seller offsets the amount paid in TVA on the initial sale. Only when a property has been substantially improved within the five-year period is it likely to attract a significant TVA bill.

All business operations in France are theoretically liable for TVA as long as an ‘economic activity’ is involved. This would apply, for instance, to a gîte business. This is different to the UK situation, where many small businesses fall below the threshold.

‘Economic activity’ is conditioned by the nature of that activity and the business itself. In general, the rules are:

• Those involved in agricultural, trading, manufacturing, and service industries are required to register.
• Salaried activities are normally exempt, as are insurance and medical activities, educational services, and transactions subject to other taxes. Those in the ‘buy to let’ sector have sometimes taken advantage of the educational services’ ‘exemption’ by gilding holiday packages with educational activities. The TVA man invariably looks closely at packages of this kind. Success in applying for this exemption will depend on the educational content involved. If this is seen to be peripheral, i.e. if there are no experienced qualified instructors, defined course content, and some sort of ‘qualification’, the exemption is unlikely to be accepted.
• Special rules apply to advertising, staffing agencies, research, and the hire of equipment and machinery.

TVA is assessed on the value added for each stage of production. A credit system is applied through which TVA is charged down the chain of production to the point of sale. At this stage, the bill is finally paid by the customer.

The assessment applies to all amounts received by sellers and suppliers in exchange for the services received or the goods sold. In the case of a product, tax liability is incurred at the time the goods are delivered. Services can be paid on an accruals basis. The TVA payable is calculated by deducting input from output TVA. Any excess will be refunded.

Form CA3

The standard TVA form (CA3), must be completed quarterly by small businesses. These are defined as companies that do not pay capital gains tax. Other businesses must make out a monthly return.

CAR TAX

Although tax on privately-owned vehicles was abolished in 2002, tax on company-owned vehicles was not. The amount payable depends on the horsepower of the vehicle. The rate varies between €1,000 and €2,000.

Îie de France

An additional annual levy is charged on prime commercial sites in the ÎIe de France region. This varies between €3 and €10 per square metre of the surface area.

INITIAL TAX LIABILITY

Initial tax liability depends on whether you are starting a new business or taking over an existing one.

Starting a new business normally involves the purchase of a fonds de commerce. Taking over a new business involves paying transfer duties droits d’enregistrement). The transfer duties apply to all assets transferred, apart from goods subject to TVA.

Transfer duty (droits d’enregistrement)

If you are taking over an existing letting business this may be subject to transfer duty. The existing scale of charges is:

Table 7.1 Transfer duty charges

Property value	National	Department	Local	Total
Less than € 15,250	Nil	Nil	Nil	Nil
From €15,251 to €45,750	6%	0.6%	0.4%	7%
In excess of € 45,751	11.8%	1.4%	1%	14.2%

In the case of a business take-over there is a one-off transfer duty charge of 4.8%. If however the new company is formed as a société anonyme (a type of limited company) there is no duty payable – as long as the transfer took place outside France.
Capital gains tax is not applied to business purchases.

Business licence tax taxe professionnelle)

The tax is primarily targeted at the proprietors of offices and shops. Owners of gîtes, bed and breakfast accommodation, and long-term rental property are generally exempt.

In many ways, the tax is similar to the business rates system formerly applied in the UK. It is based on an agreed rental value of fixed assets. This includes a notional market value of a rented property. A distinctly French feature of the tax is that the fixed assets figure is taken to include 18% of salaries paid in the tax year before last.

The taxes are abated in the first year, then generally on a sliding scale for five years.

The amount levied can vary enormously in percentage terms according to local incentives to attract business. To complicate matters further taxe professionnelle is a political hot potato. The policy, and therefore the amount charged, can change considerably following each round of local government elections.

In the year 2004, the lowest rate of taxe professionnelle levied in France was 10%, the highest was 26% and the median national average was 17.14%.

A typical small business bill may look like this:

Value of property	€100,000
Value of additional fixed assets	€ 25,000
18% of payroll	€ 12,500
Total charge value	€137,500
The total tax payable at national median rate (17.14%)	€ 23,567

CORPORATION TAX (IMPÔTS SUR LES SOCIÉTÉS)

All businesses registered in France are subject to corporation tax apart from:

• new businesses, which are exempt for three years
• certain small businesses eligible for taxation under the simplified business income scheme. This exemption would normally apply to gîte owners.

The tax is currently 42% of distributed profits, and 39% of undistributed profits. It is collected quarterly. A definition of taxable profit is similar to the formula applied in the UK. The main elements are:

• The difference between the cost value of stock at the beginning and the end of the year. Added to this is the value of the services, subsidies, and income from fringe profits such as interest payments.
• Allowable expenses to set against this include: salaries, welfare payments, interest and loans, depreciation of equipment, education and training expenses, and the purchase of certain goods necessary for the running of the business.

TAXATION OF BUSINESS INCOME (IMPÔTS SUR LES BÉNÉFICES INDUSTRIELLES ET COMMERCIAUX)

This is the small business alternative to corporation tax. The definition of a small business can be complex, but is normally taken to include:

• sole traders
• a partnership based on a limited liability company
• a family-owned limited liability company.

Businesses that qualify have profits taxed on a basis very similar to that of personal income tax, although taxable profits are calculated as for corporation tax. Business income scheme taxation has advantages when the chargeable rate of income tax is lower than the corporation tax. This applies to most small businesses. In exceptional circumstances, however, it may be advantageous to change the legal identity of the business in order to fall into the net of corporation tax.