Pay­ing your way

Pay­ing tax on in­come is an in­evitable part of life wher­ever you live. Rob Kay ex­plains the essen­tials for those liv­ing in France

Living France - - Les Pratiques -

If you are liv­ing in France or are mov­ing there soon, you need to fa­mil­iarise your­self with the French tax regime and un­der­stand how it im­pacts your per­sonal sit­u­a­tion. You need to be in­formed on cap­i­tal gains tax, wealth tax, suc­ces­sion tax and lo­cal prop­erty taxes, but the start­ing point for most peo­ple is in­come tax.

If you are res­i­dent in France for tax pur­poses, you are li­able to French tax on your world­wide in­come. You need to fol­low the do­mes­tic tax res­i­dency rules, as well as the UK ones if you re­tain ties or spend time there. You be­come tax res­i­dent from the day you ar­rive if you in­tend to stay per­ma­nently or in­def­i­nitely. France uses the ‘split-year’ ap­proach, so you can be non-res­i­dent for half the year and res­i­dent for the rest.

Note that you do not have a choice; you ei­ther are, or are not, French tax res­i­dent un­der the rules. If you are, it is your re­spon­si­bil­ity to make your­self known to the French tax author­i­ties and to fully de­clare your in­come, cap­i­tal gains and wealth.

Taxes are de­clared and paid a year in ar­rears, so in­come earned in 2017 is de­clared on your tax re­turn due by the end of May 2018. The tax can be paid in three equal in­stal­ments or 10 monthly in­stal­ments.

IN­COME TAX

There are two forms of tax on in­come and gains: In­come tax on scale rates – most in­come, in­clud­ing earn­ings, pen­sions, rental in­come and in­vest­ment in­come – is taxed at pro­gres­sive scale rates. So­cial charges – paid in ad­di­tion to in­come tax. In France the to­tal in­come of a house­hold is as­sessed; hus­band and wife are not taxed sep­a­rately. A fam­ily is di­vided into a num­ber of parts fa­mil­iales, in­clud­ing chil­dren (half part for the first two chil­dren). 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. This helps avoid the higher rates of tax, though there is a max­i­mum ben­e­fit that a house­hold can re­ceive.

In­come tax rates are usu­ally only set at the end of the tax year to which they re­late. The rates for 2016 in­come are:

Higher earn­ers have to pay sur­taxes as fol­lows: Sin­gle per­son with in­come be­tween €250,000 and €500,000 per part – 3% Sin­gle per­son with in­come ex­ceed­ing €500,000 – 4% Fam­ily with in­come ex­ceed­ing €500,000 – 3% In­come ex­ceed­ing €1,000,000 per part (in­di­vid­ual or fam­ily) – 4% A 20% in­come tax re­duc­tion is be­ing in­tro­duced for tax­pay­ers with low in­come up to €18,500 for in­di­vid­u­als and €37,000 for cou­ples. For those earn­ing up to €20,500 (in­di­vid­u­als) and €41,000 (cou­ples) a scale rate mech­a­nism is be­ing in­tro­duced. These lim­its in­crease by €3,700 for each ad­di­tional half part for de­pen­dants.

IN­VEST­MENT IN­COME

Bank in­ter­est, div­i­dends and cap­i­tal gains made on the sale of shares are added to your other in­come for the year and taxed at the scale rates of in­come tax above.

There is a big dif­fer­ence in France be­tween in­come and tax­able in­come. If you ar­range your in­vest­ments to pro­duce non-tax­able ‘in­come and gains’, this can make a sig­nif­i­cant dif­fer­ence to your tax bill.

PEN­SIONS

Pen­sions are taxed at the pro­gres­sive scale rates. The tax­able base con­sists of in­come net of so­cial se­cu­rity con­tri­bu­tions, less a 10% de­duc­tion of a min­i­mum of €379 and a max­i­mum of €3,711 per house­hold per year (for 2015 in­come).

UK gov­ern­ment ser­vice pen­sions re­main tax­able in the UK and are not taxed di­rectly in France. How­ever the in­come has to be in­cluded as part of your tax­able in­come and a credit equal to the French in­come tax and so­cial charges that would have been payable is given. This ap­plies even if no ac­tual tax is paid in the UK.

An­nu­ities and QROPS can re­ceive more ben­e­fi­cial treat­ment but you need to seek per­sonal ad­vice.

Pen­sion lump sum pay­ments are tax­able in France. They are taxed at the in­come tax scale rates. You can, how­ever, opt for a fixed in­come tax rate of 7.5%. This is avail­able only if the pen­sion con­tri­bu­tions were de­ductible from your or your em­ployer’s tax­able in­come, and the whole pen­sion fund is taken at once.

A PAYE sys­tem is due to be in­tro­duced in 2018

EM­PLOY­MENT IN­COME

France does not cur­rently have a Pay-AsYou-Earn (PAYE) sys­tem for em­ploy­ees, but one is due to be in­tro­duced from Jan­uary 2018. This will ap­ply to em­ployed and self-em­ployed in­di­vid­u­als as well as those re­ceiv­ing French pen­sion and French un­fur­nished let­ting in­come.

If you are self-em­ployed your in­come is taxed un­der one of two regimes, the BNC ( béné­fices bon com­mer­ci­aux) regime for all forms of non-com­mer­cial in­come, or the BIC ( béné­fices in­dus­triels et com­mer­ci­aux) regime which ap­plies to com­mer­cial and more.

There are de­duc­tions that can be made from your gross in­come be­fore tax is cal­cu­lated, such as so­cial se­cu­rity con­tri­bu­tions, pen­sion con­tri­bu­tions, a 10% de­duc­tion in lieu of em­ploy­ment-re­lated ex­penses (with min­i­mum and max­i­mum de­duc­tions), etc.

IN­COME TAX DE­DUC­TIONS

In­di­vid­u­als over the age of 65 (or who hold an in­va­lid­ity card or re­ceive a mil­i­tary pen­sion) are en­ti­tled to a tax-free al­lowance of €2,347 (for 2016) where their to­tal house­hold in­come is up to €14,730 and €1,174 for in­come of be­tween €14,730 and €23,730. The al­lowances dou­ble for a mar­ried or PACS cou­ple where both ful­fil the con­di­tions.

If your tax­able in­come is be­low €1,553 (€2,560 for a cou­ple), a tax credit known as the dé­cote will re­duce your tax li­a­bil­ity.

Var­i­ous tax cred­its are avail­able, which are de­ductible against the ac­tual tax. Some of them are given on a cu­mu­la­tive ba­sis, and the max­i­mum credit that can be re­ceived is €10,000 of the global net tax­able in­come of the house­hold (be­fore the scale rates are ap­plied).

SO­CIAL CHARGES

So­cial charges are an ad­di­tional tax levied on in­come and cap­i­tal gains. They are cal­cu­lated based on the in­come de­clared in your tax re­turn. So­cial charges are made up of five el­e­ments, and the com­bined rates are as fol­lows: Salaries and un­em­ploy­ment ben­e­fits (on 97% of gross): 8% Re­tire­ment or dis­abil­ity pen­sions, in­clud­ing lump sums (on 95% of gross): 7.4% In­vest­ments, an­nu­ities, rental in­come, cap­i­tal gains and in­ter­est: 15.5%

Pen­sion in­come es­capes so­cial charges if you are not af­fil­i­ated to the French health sys­tem (this is gen­er­ally the case if you hold Form S1).

This ar­ti­cle can only out­line the ba­sics of French in­come tax. Note that at the time of writ­ing, the bud­get for 2017 had not yet been fi­nalised. It is im­por­tant to seek personalised, pro­fes­sional ad­vice, par­tic­u­larly if you are look­ing to lower the tax li­a­bil­i­ties on your sav­ings, in­vest­ments and pen­sions. French tax may be high, but it does present op­por­tu­ni­ties for ef­fec­tive tax plan­ning if you work ahead and take spe­cial­ist ad­vice.

Rob Kay is se­nior part­ner at Blevins Franks blevins­franks.com

* The tax rates, scope and re­liefs may change. Any state­ments con­cern­ing tax­a­tion are based upon our un­der­stand­ing of cur­rent tax­a­tion laws and prac­tices which are sub­ject to change. Tax in­for­ma­tion has been sum­marised; an in­di­vid­ual must take personalised ad­vice.

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