TAXATION

The basic taxes for individuals are:

• Income tax. This is divided in French law into earned income (impot sur le revenue) and unearned income (impot des revenues des capitaux mobliers).
• Land tax (taxefonciére).
• Community tax (taxe d’habitation).
• Capital gains tax (régime des plus values des particuliers).
• Death duties (droits de succession).
• Gift tax (droits de donation).

Registration

The ownership of all properties must be registered with the French tax authorities. Owners who are not resident have to register by 30th April following completion of the property purchase. Residents are expected to register immediately with the local Centre des Impots. Non-resident owners should register with the Tax Centre for Non Residents at:

Centre des Impots des Non-residents
9 Rue D’Uzes
75094 Paris

Domicile

For international tax purposes the concept of domicile is important. Those who have their fiscal domicile in one country theoretically pay tax in that country on their income. There is, however, some give and take on this. Some pensions, for instance, originating in the UK, are automatically taxed there.

Those considered to be domiciled outside France pay tax only on that portion of their income earned in France. You will be said to have a French fiscal domicile if:

• You have a home in France and spend more than 183 days in France in any financial year.
• Your spouse and family live in France for more than 183 days in any financial year, even if you spend most of your time out of the country.
• You work in France on either a salaried or self-employed basis, unless you can prove that work is ancillary to your main employment.
• Most of your income is generated in France. This could for instance catch retired people who run a successful gîte business.

Income Tax

If you are domiciled in France you are liable to pay income tax. Even if you are not domiciled, you remain liable for tax on income earned in France; this would, for instance, include income from a gîte business. The French tax laws are complex and there will be winners and losers in comparison with the UK system.

Long-term residents frequently choose to take French citizenship because foreigners are subject to an increasingly heavy burden of personal taxation. Set against this, however, is the fact that in many situations a tax burden can be reduced by paying as much tax as possible (tax on public service pensions, for instance) in the UK. Equally, you can legitimately set personal allowances against your income in both countries. Indeed there is a whole range of scenarios where a favourable outcome is achieved by being 100% honest.

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

• Money spent on major property repairs.
• Money spent on certain ‘green projects’ such as the installation of solar energy panels for heating.
• Payments for maintenance and dependent relatives other than children.
• Gifts to certain charities.
• Contributions to the Securité Sociale.
• Approved life assurance premiums.
• Interest payments on certain loans.
• Special arrangements for single parents with young children.

The French income tax system benefits large families and those on relatively low incomes. The tax year runs from January 1st each year and bills are paid in three equal instalments in the year following the liability.

Filling in a tax return is difficult because of the complexity of the system and the amount of 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 will 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 d’imposition forfaiture. Using this system income is assessed according to arbitrary norms which includes ascribing a 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 maximum new showroom value, servants are assumed to have massive salaries, and race horses are reckoned to be winners.

The system is rarely applied, but it demonstrates what can happen to those who fall foul of the tax authorities.

Land Tax

Taxe foncière is levied by the local commune and is very 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, grain stores, wine presses and stables. New buildings are exempt from the 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 index of inflation.

Community Tax

Taxe d’habitation is paid by the resident occupier of a property on January 1st 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 the tax.

The base rate of the tax is calculated again on the notional letting value of the property, last calculated in 1987 and up-rated since then by indexation.

This tax is reduced when the property is used as the principal residence of a family. Since 1989 each commune has fixed taxe d’habitation at rates of five, ten or 15% of the rentable value.

Both taxe fonciére and taxe d’habitation are payable by UK residents whether or not the property is designated as their main residence. But even taken together they rarely amount to 65% of the average UK Council Tax Band D. In France it is national rather than local taxation that really hurts.

Capital Gains Tax

The régime de plus value des particuliers is imposed on anyone who is domiciled in France when assets are sold, but their primary residence is exempted. The tax is invariably applied to those selling French property who are domiciled abroad.

The tax is levied at 16%. The capital gain is deemed to be the difference between purchase price and sale price, but the seller can offset:

• The supplementary costs of making the purchase, or ten per cent of the purchase price – whichever is the higher figure.
• An indexation of the increase in property values calculated according to government figures.

French law demands that foreign sellers employ an agent to handle the sale. This agent (normally a notaire) is responsible for paying the tax to the government. It is possible to get clearance for payment before completion; this is highly recommended as it saves time and paperwork and will reduce the fee the agent charges for his services.

In practice the capital gains tax payable on a property sale is likely to be modest or non-existent for many sellers. Those who improve property considerably, or create new residential units (such as an integral independent granny flat) are most likely to find themselves paying for the privilege. The tax is designed to catch foreigners who are systematically renovating French property for profit.

Inheritance Tax

French law is very concerned with the idea of passing down assets within a family. The concept is called patrimoine and it is the guiding principle of droits de succession. The main elements of patrimoine are that:

• Payments are made by those who inherit, according to the value of assets they receive and their relationship to the deceased. The closest relationships suffer the smallest tax burden. A son would therefore receive more of the inheritance than a nephew and so on. Special rules apply to surviving spouses.
• All assets in France are subject to droits de succession. The assets of those domiciled in France include property at home and abroad.
• The assets of those not domiciled in France exclude property outside the country. Double tax agreements with other countries ensure that droits de succession paid in France are exempted from tax liability elsewhere.

The French rules of inheritance, particularly with regard to the entitlement of surviving spouses, have been simplified recently, but owners of property in France are well advised to have a will drawn up by a notaire. This may now include a special contract called a communaute universelle. Another possibility is to invest in a special kind of assurance vie in which you name beneficiaries, which has the effect of ensuring that up to €147,000 is free of French inheritance tax.

Gift Tax

The rules for droits de donation are similar to those applied above. The idea is to prevent the avoidance of inheritance tax.

There is some mitigation for:

• Gifts given as wedding presents.
• Gifts made by people under the age of 65.

Value Added Tax

There are presently three rates of Taxe sur la Valeur Ajoutée (TVA) in France:

• 5.5% for most agricultural and food products, transport, entertainment and some principal-residence improvements.
• A standard rate of 19.6% for most other items.
• 2.1% for medicaments, some entertainments and some publications.

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

Any property re-sold within that five year period is also subject to TVA. This concerns UK buyers more than is necessary as the amount is not usually considerable because the seller offsets the amount paid in TVA on the initial sale, and French property values generally advance more cautiously than those in Britain. Only when a property has been substantially improved or modified during the five year period is it likely to attract a significant TVA bill.