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 after 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).
   Even if a foreigner spend less than 183 days in France, they may be tax resident if they have spent more time in France than in any other country.
   Days of arrival and departure can count towards the cumulative total of days spent in France although this is a grey area.
   
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.

The Income that is Taxed

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

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 40 percent. There is also a fixed rate of income tax of 18 percent at source on bond or bank interest and on capital gains, and by election this can be applied to interest, say, from other EU countries (see below).

Income Tax Scale Rates for 2008 tax returns based on 2007 Income

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.

For example, in a married couple with four children the family would be entitled to five parts. The system extends to other categories of dependent persons such as sick or disabled members of the family who are dependent upon the married couple. A single person, without dependents, is entitled to only one part.

Employment Income

A person who is employed in France, unless they are not resident, will be paid gross, and 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.

It is proposed that from 2009, withholding tax will be deducted from employment income at source. Details of this proposed tax have yet to be announced, but the tax withheld is likely to be at a flat fixed rate. If this is the case, it is probable that the income will remain subject to the scale rates of tax, and adjustments made after the year end, either in terms of refunds or additional tax payable on this income.

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 €27,000, it will usually be assessed under the Micro-BNC regime which allows the tax payer 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 tax payer opts out of the Micro regime (for example, because their expenses exceed the prescribed amount), they will be taxed under the Régime de la Déclaration Contrôlée. This is one of the Réel regimes whereby the actual income net of expenses of the business is taxed. They will need to prepare full accounts according to a set formula, and also prepare a separate tax form in respect of the business, and keep comprehensive records of all income and expenses. 

Note: this can be expensive, and it may be more cost-effective to apply the Micro-BNC even though it means some tax being paid on notional profits that would otherwise not be 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 €27,000 per year, 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 furnished lettings, a more generous Micro-BIC applies, whereby if gross income is less than €76,300 a flat 71 percent of income is deducted leaving only 29 percent to be taxed.

Analogous considerations apply in relation to alternative Réel accounting and taxation.

If the turnover exceeds the above thresholds, a tax payer 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. 

A full set of accounts, together with all supporting documentation, must be submitted to the French tax authorities each year. There are also specific record keeping requirements under this regime, and all documentation should be kept for a period of 10 years.

Bank Interest

French bank interest is subject to a fixed withholding tax of 18 percent. 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

Tax on dividends can be aligned with that of bank interest and other investments that are taxed at a fixed rate.

Taxpayers have the option of electing for dividends to be subject to a final and fixed withholding tax rate of 18 percent applied to the gross dividend with no deductions or abatements, instead of the usual scale rates applying after complex deductions and abatements which can be quite generous.

If the election for the withholding tax is made, there will be no allowances, exemptions, credits or deductions. As a result, for most taxpayers whose marginal rate of tax is 30 percent or less, the election for fixed rate taxation will not be beneficial. For taxpayers whose marginal rate of tax is 40 percent, the election for fixed rate taxation will only be beneficial if dividends of more than about €30,000 are received.

Where the dividend is from another EU country, and a person wishes to make the election, they should submit Form 2777 to the French authorities within 15 days of the end of the month following receipt of the dividend and pay over the fixed rate tax (and social charges).

Pensions

Pensions are taxed in France at the progressive scale rates. Under French domestic law, retirement pensions, disability pensions, child support and alimony, are taxed at the progressive scale rates in an analogous manner to salaries. The taxable base consists of income net of social security contributions (if any), less a 10 percent deduction of a minimum of €352 and a maximum of €3,446 per household per year (for 2007).

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 €76,300, the taxable income may be calculated under the Micro-BIC regime (as above). No expenses need be demonstrated, no accounts are required and no separate tax forms for the business need be prepared. The main drawback of this regime is that it always shows a fixed taxable profit and can never show a lower net profit or a loss.

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 property is held in a SCI (French property holding company), the Micro regimes cannot apply.

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 such as management expenses; insurance; property tax; mortgage interest; depreciation; repairs; maintenance and improvement expenditure (generally where the property has been modernised, or made more comfortable, but where the structure of the property has not been changed). 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). If they do so, they could expect to automatically be 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 - not the Micro-BIC. The loueur en meublé professionnel status may provide advantages in terms of capital gains tax or wealth tax exemptions.

To register, a landlord must have a turnover in excess of €23,000 per year, or to be in a situation where the furnished rental activity represents at least 50 percent of their total income to claim this treatment. Wealth tax exemption requires the same turnover and the income to represent more than 50 percent of all their earned income (that is including that from employments and other self-employments)

However, being registered as loueur en meublé professionnel will trigger a liability to the local business tax (taxe professionnelle). The rates of this tax vary locally and it would be wise to enquire with the local tax office before any registration. It is also necessary to pay for the accountancy and extra tax forms required by the business.

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 (and capital gains) received by French residents, including pension income.

The rates of social charges are: 

• 7.1 percent on 95 percent of gross pension income
• 8 percent on 97 percent of earned (employment or self-employment) income
• 11 percent on all unearned income (for example interest, dividends and rental income) and capital gains

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 three elements: 

1. the CSG (Contribution sociale généralisée)
2. CRDS (Contribution au remboursement de la dette sociale)  
3. PS (Prélèvement Sociale). 

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 (such as French bank interest and capital gains) are not tax deductible at all, whereas those paid on income taxed at the progressive scale rates are tax-deductible.

For social charges on earned income, a proportion of the social charges are tax-deductible against income earned in that year; however, for passive (investment income) not taxed at fixed rates the tax-deductible element is applied in the following year. Any social charges deductions not off-set against income in either the current or following year can be carried forward against future income.

An EU national may be exempt from paying French social charges on their country's pension income if they hold Form E106 or E121 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 (or 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 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.

Health care contributions

A person not covered by an EU Form E106 or E121 and not working in France and paying social security contributions through a compulsory employment/self-employment scheme, 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

Deducted from gross income before tax is calculated are:

• A 10 percent deduction in lieu of expenses related to the employment (minimum deduction €396 per individual; maximum €13,328 per individual). The 10 percent deduction also applies to pension income (see above), but with different limits per household. Actual employment expenses may be claimed instead, such as journeys from home to the place of employment (limited to 40 kilometres per day), but in order to claim these, detailed paperwork and records are required, and so most French employees claim the flat rate of 10 percent
• Social security contributions
• Certain maintenance payments
• 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

Deductions from net income before tax is calculated are:

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 €2,202 where their total household income (after some of the deductions above) is up to €13,550 (for 2007) and an allowance of €1,101 for total income of between €13,550 and €21,860 (for 2007). The allowances double for a married or PACS couple where both fulfil the conditions.

There are no other allowances for individuals with disabilities. However, they are entitled to an additional half-part in respect of the disability.

Allowance for "re-attached" children

A person with a child who is married and either under 21, or under 25 and still a student or in military service, can bring them back into your family ("re-attach") for tax purposes. Thay do not get any extra parts but you can then claim an allowance of €5,568 for each of them and their children.

Tax rebates

If the tax due is less than €838 the tax office issues a credit known as the Décote.

The Décote is half the difference between €838 and the tax due. This amount is then deducted from the tax bill. So, if the tax due were €720, the Décote would be €59 (half of €118). The new tax liability is now €661.

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, limited to €8,000 per year per household. This limit will be increased by €750 per dependant, and €5,000 for each disabled dependant. 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

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. Where the marriage or PACS is entered into during the year, three tax returns must be completed; one each for the period of the tax year falling before the marriage, and one joint household return for the portion of the French tax year falling after the marriage.

Income tax returns and payment dates

Income tax is paid in the year after the income is earned. So for 2007 income the tax is paid in 2008. The tax can be paid either in three equal instalments or by ten monthly instalments from January to October. 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.

Income tax for the initial year of residence in France is usually not due until the September of the year following arrival, since no February or May payments are required.

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 2008

• 15 February: Payment of first instalment towards 2007 income tax
• 15 May: Payment of 2nd instalment towards 2007 income tax
• 31 May Normal deadline for filing resident 2008 income tax returns (2007 income) for individuals and SCIs. May be extended by agreement with the local tax office or if the return is filed electronically (see above)
• 15 June: Deadline for filing 2007 Wealth Tax returns for French residents
• 30 June: Deadline for filing non-resident 2008 income tax returns for residents of Europe, Littoral Mediterranean, North America, Africa
• 15 July: As above for residents of Central and South America, Asia, Australia and other countries
• 15 July: Filing of non-resident Wealth Tax returns for residents of Europe, Littoral Mediterranean, North America, Africa
• 31 August: As above for residents of Central and South America, Asia, Australia and other countries
• 15 September: Income tax, CSG & CRDS demands - payment/repayment of balance of 2007 French income tax
• October/November: Payment of local tax foncières and taxe d'habitation for 2008

Further Information

The French tax authorities (Direction Générale des Impôts) have published a 74 page document in English which explains all French taxation due by residents of France. This includes details on income taxes (corporation tax, social charges and the tax on income), property tax (registration taxes, wealth tax and more), direct taxes (business tax and residence tax - taxe professionelle and taxe d'habitation) and taxes on expenditure such as value added tax (TVA).

• The document is available as a PDF: Click here
• For a glossary of French taxation terms in English, along with a list of the states with which France has signed a convention for the
  avoidance of double taxation (as on 1 January 2005): Click here (PDF)

Related Information

• See AngloINFO INFOrmation Page on French Taxes
• See AngloINFO INFOrmation Page on Capital Gains Tax
• See AngloINFO INFOrmation Page on French Property Tax
• See AngloINFO INFOrmation Page on Paying Taxes in France: Tax Payment Deadlines

Information by Blevins Franks Tax Advisory Service
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