Concept of Residence
In brief residents pay income tax on their world-wide income (subject to any treaty exemption) whereas non-residents only pay income tax on their French source income. Both French and non-French nationals are considered resident if their principal place of abode, professional activity or "centre of economic interest" is in France.
Tax is charged on the annual disposable income from all sources (e.g. salary income, rental income). The tax year is the same as the calendar year. Employers in France usually pay salaries monthly but each month is only 1/13th of the annual salary. June and December's salary is increased by 1/26th each to account for the remaining 1/13th. Salaries are paid at source after the deduction of social contributions. Income tax must be declared and paid by the individual. A company must however submit to the tax authorities a listing of all employees together with details of salary payments. A salary includes all remuneration and benefits in kind. As in the UK, benefits in kind include a company car (reduced by the proportion of business use), meals paid for by the employer and education expenses for the employee and dependent children paid for by the employer. However, certain pension contributions and medical insurance premiums are deductible. Both non-resident French nationals and foreign national residents will not be taxed on moving expenses, temporary accommodation for 30 days and travel expenses to return home.
Deductions from Taxable Income
There are three main deductions from taxable income tax: A deduction for social charges (approximately 20% of gross salary) and an allowance for non-reimbursed business expenses (calculated as 10% of salary after social charges). No proof of expenditure is required. And a further 20% deduction (calculated on a given salary after social charges)
Other types of deductions include interest on a loan to purchase a principal home, life insurance premiums or investments in rental properties, all being subject to limits. If both parents work, childcare expenses may be deducted. Alimony and child support may also be deductible.
Interest & Dividends
Dividends are received net of a deduction for tax. This tax credit is deductible when calculating income tax payable.
Rental & Other Investment Income
Rental income rules apply for royalties, with the exception of royalties from industrial income which are taxed at the rate of 16%, plus social contributions at 7.5%
The general rule is that losses from one category of income may be offset against profit in another category. However, restrictions apply to rental losses, professional losses, and capital losses on quoted stocks and bonds. Losses may be carried forward for 5 years to be offset against future profits
Social charges are payable at a rate of 18% to 20% (depending on retirement fund contributions) on salary, bonuses and benefits in kind. These give an individual the right to a pension, unemployment benefit, and daily compensation in the event of disruption to professional life, family allowance, and full professional accident coverage and partial/total reimbursement for medical treatment. In addition, it is usual for an employer to augment the social security system by making contributions into a mutual fund, an insurance company, which will make up any shortfall in state reimbursement of medical expenses.
Social Charges - 2014
|Salaries||Pensions & Benefits||Investments/Rental & Capital Gains|
|CSG||7.5%||6.6% to 3.8%||8.2%|
|Prélèvement de Solidarité||0%||0%||2.0%|
Real Property and Shares in Real Estate Companies
The sale of a principal private residence is generally exempt from tax. Gains from a second residence may also be exempt if inter alia they do not own the principal private residence (see French Property Acquisition pages 109 to 114). If no exemption applies, gains from the sale of real estate held for two years or less are taxed as ordinary income. If held for greater than two years, the gain is calculated by using an inflation adjusted price and then reduced by 6% for every year over two years that the property has been held. To calculate the tax payable in this case, one fifth of the gain as calculated above is added to the tax payers* income. The tax payable, calculated as described above, is assessed including and excluding the taxable gain. The difference between the two figures is then multiplied by five to give the total tax payable on the gain
Generally, if the deceased was resident in France, tax is payable on all world-wide net assets. For non-residents, only French assets are taxable. In France, as in most other civil law countries there is 'forced’ heirship. However, it may be possible to circumvent these problems with correct planning.
Personal IT Allowances
The rate of tax depends on the relationship of the recipient to the deceased:
Non-French National - Resident in France
The rules for residence for social security purposes are different to those for income tax, if the person is a national of a country with whom France has concluded a double tax treaty. Often it is the nationality, which determines residence, especially for EU nationals. Since French rates of tax are generally lower than in the UK, but social security rates substantially higher, tax savings may be achieved by being resident for income tax purposes but non-resident for social security. However, the substantial benefits of the French social security system will be lost
French National Non-Resident in France
There are certain types of income, which are exempt from income tax. A particular example of this relates to a French resident working for a French established employer but who works and gets taxed in a foreign country. This income may be exempt if: the employee was engaged in construction, engineering, exploration or extraction for more than 183 days in a 12 month period and, the employee can prove that tax paid in that country was at least 2/3rd’s of the tax that would have been payable in France. Bonuses paid for foreign duty for this class of person may be exempt even if the above conditions are not satisfied.
For more information on the French Tax System please contact one of our tax planning consultants.