Understand what is classed as taxable income, and how it is assessed...
Tax declarations in France
When you become a tax resident, it is your responsibility to make yourself known to the French tax authorities and to fully declare your income, capital gains and wealth. If you are married or in a civil partnership (PACS) you complete a joint tax return.
Taxing a Household in ‘Parts’
Taxable income is assessed according to the total income of your household. To ease tax rates where there is a high income but several family members, the household is divided into ‘parts familiales’ to represent each person.
The total household income is then divided by the number of parts. The relevant income tax scale rate is applied to this figure, then that tax value is multiplied by the number of parts.
So for a household with two parts and a total income of €50,000, the value of each part would be €25,000. Children count as one part, and single parents benefit from an additional half part if they live alone with their child(ren) on the 1 January of the taxable year.
For tax purposes, the income of a married or PACS couple (the French version of civil partnership, open to both same and opposite sex couples) is divided into two parts. There is 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.
Tax Resident in France
Under French domestic rules, you become a French tax resident the day after you arrive in France with the intention of staying indefinitely. Otherwise it will be from the date you can be seen to fulfil at least one of the four following tests:
- France is the location of your main residence or home (foyer). This rule ignores temporary absences and is the one the French authorities will most rely on. If your spouse and children live in France, you will also probably be considered a resident even if you work abroad.
- France is your principal place of abode (lieu de séjour principal). This usually means you spend more than 183 days in France in a calendar year. It does not have to be a continuous period of 183 days and part days are included. Even if you spend less than 183 days in total in France, you may be seen as a resident if you have spent more time in France than in any other single country.
- Your principal activity is in France – for example, your occupation or main income is in France (whether salaried or not), unless you can show that such activity is purely incidental (à titre accessoire).
- France is the location of your most substantial assets (your ‘centre of economic interests’). This applies if France is where your main investments are, where your assets are administered, or where a larger part of your income arises.
Note in particular that you do not have a choice about your residency status – you either are, or are not, a French tax resident under the rules.
If you can also be considered a tax resident under the rules of another country that has a double tax treaty with France, then your residency will be decided by a set of ‘tie-breaker’ rules. These look at factors like the location of your permanent home, where your life is centered and where you normally live. If your residency still cannot be determined in this way, it comes down to your nationality and, if necessary, mutual agreement between the two countries. There is such a double tax treaty between the UK and France.
Self-employment income (with the exception of agricultural income) is taxed in France under one of two regimes:
- The BNC (Bénéfices Non Commerciaux) regime
- The BIC (Bénéfices Industriels et Commerciaux) regime
BNC (Bénéfices Non Commerciaux)
The BNC regime applies to all forms of non-trading income, such as teaching and consultancy services. Accounts are prepared on a ‘revenue’ or ‘cash’ basis, so both income received and expenses paid are taken into account.
If your gross annual income is below €70000, it will usually be assessed under the Micro-BNC regime. This allows you to deduct a flat 34 percent for expenses so that only 66% of your gross income is taxable.
Otherwise you will be taxed under a regime whereby your actual income less necessary expenses is taxed. This can be much more complicated and costly than the Micro-BIC regime.
BIC (Bénéfices Industriels et Commerciaux)
The BIC 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 €70,000 the simplified Micro-BIC regime can apply, which will allow a flat 50 percent deduction. This means that only 50 percent of your income is taxable. This will usually apply to income from furnished lettings, with 50 percent deductible in lieu of actual expenses.
For the sale of goods, or the provision of gîtes or chambers d’hôtes style rental accommodation, a more generous Micro-BIC applies. In these cases, if gross income is less than €170,000, a flat 71 percent of income is deducted, leaving only 29 percent taxable.
If the annual turnover for sale of goods and letting businesses exceeds the above thresholds, you will be required to produce near-full accounts produced to French accounting standards. You will also be entitled to deduct most normal expenses relating to the business from your income.
Bank Interest, Dividends and Capital Gains on the Sale of Shares
These are added to your other income for the year and taxed at the progressive scale rates of income tax. Social charges are also levied at the investment income rate of 15.5 percent.
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.
UK government service pensions remain taxable in the UK and are not taxed in France. However, 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.
Lump sums received from pension funds are taxable in France. Provided the pension contributions were deductible from your or your employer’s taxable income, and if there is no possibility of taking another lump sum in future, you can opt for a fixed rate plus social charges (if affiliated to the French social security system) with a deduction of 10 percent of the gross capital payment. If a lump sum has already been withdrawn or there is the potential for further withdrawals, a lump sum will be taxed as 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:
- Revenus Fonciers for land and unfurnished lettings
- Bénéfices Industriels et Commerciaux (BIC, as explained above) for furnished lettings
The Micro-Foncier regime can similarly apply to unfurnished lettings. Where total gross income from unfurnished lettings is below €15,000 per year, you can deduct a flat 30 percent as expenses. The remaining 70 percent of the gross rental income from the unfurnished lettings will be taxable in France.
If the annual turnover for land and unfurnished letting exceeds €15,000 per year, you will be required to produce near-full accounts produced to French accounting standards. You will also be entitled to deduct from your income most normal expenses relating to the business.