Taxation of French property
Local Taxes
There are two local property
taxes in France which are
both based on the property's
theoretical rental value
according to the local land
registry, and is adjusted in
line with inflation. The
rates of tax will vary from
region to region due to the
varying rates of tax imposed
by the regional and local
governments.
Habitation Tax (Taxe
d'Habitation)
The occupier of the French
property is liable for this
tax. It is due of the 1st
January and is payable by
the person who was the
occupier at that date. There
are exemptions for over 60s
and also if the property is
incapable of occupation due
to it needing extensive
renovation. The test if
whether the property is
furnished and whether you
can convince the local
mayor.
Fundamental
Tax (Taxe Foncière)
The owner of a French
property is usually liable
for this tax, also known as
'impôt foncier', a land tax
which is generally payable
in one lump sum on the 1st
January in each year. Unlike
the taxe d'habitation,
apportionment can be made
between the buyer and
seller. If there is an
apportionment this should be
stated in the contract for
sale. This tax is even
payable on unbuilt land. It
may be divided into two
parts, one for the building
and some of the land
surrounding it, the other
for the remainder of the
land. There are exemptions
for some agricultural land
and the owners of new
property have, at the time
of writing, a two year
exemption.
Personal Taxes
As a non-resident property
owner in France, you may be
liable for income tax, value
added tax wealth tax ,
capital gains tax and
inheritance tax. Individual
situations vary considerably
and it is best to seek
specialist advice from a tax
consultant who has knowledge
of the French tax system.
Income Tax
The income derived on
property in France should be
declared in France. Once a
property is rented out it
will become necessary to
file a French tax return (impôt
sur le revenu). This
Annual Tax Declaration is
mandatory and must give the
tax authorities complete
information concerning the
taxpayer's identity and
their marital and family
situation, as well as the
rental value of thier
dwellings and/or of their
income from French sources.
The forms can be obtained
from Centre des Impôts
des Non-Résidents, 9 rue
d’Uzès, 75094 PARIS CEDEX 02.
Taxpayers not domiciled in
France benefit from special
deadlines for filing this
tax return -- for Europe
this is 30th of April.
Certain allowances are
deductible e.g. interest
payable on a local mortgage,
repairs and maintenance,
certain real estate taxes,
management expenses such as
concierge and security, etc.
French income tax is payable
by non-residents at
progressive rates with a
minimum of 25%. Rental
income should also be
declared in the the country
of your dominicile for tax
purposes but the French
income tax paid in France is
taken into account.
Individuals of French or
foreign nationality are
considered resident for tax
purposes if their home,
principal place of abode,
professional activity or
centre of economic interest
is located in France, or if
they live in France for more
than 180 days per year. As a
resident, an individual is
taxed on their worldwide
income, subject to
applicable tax treaty
relief. Individuals resident
outside France are taxed on
French-source income such as
income derived from real
property. French income tax
is levied at a progressive
rate, from 7.05% to a
maximum rate of 49.58%.
Family coefficient rules are
used to combine the
progressive tax rate with
the tax-paying capacity of
the household resulting in a
lower effective tax rate.
The following table
summarises the 2003 income
tax brackets and rates
(applicable to 2002 income)
for a single individual
taxpayer are (draft Finance
Bill, 2003):
|
Income Bracket |
Tax Rate |
|
Up to €4,191 |
0% |
|
€4,191 - €8,242 |
7.05% |
|
€8,242 - €14,506 |
19.74% |
|
€14,506 - €23,489 |
29.14% |
|
€23,489 - €38,218 |
38.54% |
|
€38,218 - €47,131 |
43.94% |
|
Above €47,131 |
49.58% |
Even if you do not let your
French property, there is
the possibility that the
French tax authorities may
seek to charge you income
tax on 3 times the national
income from the property if
you are a tax resident of a
country which has not
entered into a double
taxation treaty with France.
Wealth tax
A wealth tax (impôt de
solidarité sur la fortune)
is levied in France each
year on individuals with a
total net wealth exceeding
€720,000. For non-residents,
wealth is assessed on the
basis of their assets
situated in France. Their
value is based on the fair
market value of the assets
in France as of 1st January
of each year. Tax is
assessed on the net wealth
according to a progressive
rate from 0.55% to 1.8%
(above €15 million).
Business assets are exempted
from wealth tax. Therefore,
you are only liable for
wealth tax if the total of
your savings and French
property is worth more than
€720,000.
Capital Gains Tax
Capital gains derived from
the disposal of shares and
real property are subject to
tax. French tax residents
are subject to tax on gains
realised worldwide (subject
to applicable tax treaty
relief). Subject to the
provisions of these tax
treaties, non-residents are
subject to tax in France on
sales of a substantial
shareholding (over 25%), or
of real property or of
shares in real property
companies situated in
France.
Capital gains realised on
the disposal of shares are
taxable at a rate of 26%.
The actual capital gains tax
is 16% increased by an
additional social
contribution, amounting in
total to 10% for 2002-2003.
Capital gains are taxed if
the annual amount of
disposals exceeds €7,650 per
taxable household.
Gains derived from the sale
of real property or shares
in real property companies
are included in the taxable
amount and are subject to
the progressive rate of
personal income tax. Capital
gains realised on the sale
of real property held for
more than two years benefit
from more favourable
treatment and capital gains.
Sales of a principal private
residence or, under certain
conditions, of a second
home, benefit from a
complete exemption.
Therefore, if you sell a
property property which is
not your primary residence
within two years you are
liable for income tax,
rather than capital gains
tax. If you sell a property
which is not your primary
residence after two years,
then an inflationary
allowance of 5% per year is
taken into consideration
when calculating the capital
gains tax you are liable to
pay. You are totally exempt
to pay capital gains tax on
an asset if the disposed
asset is held for 22 years
or more (i.e. 2 years with
no inflationary allowance
plus 20 years at 5% per year
inflationary allowance,
yeilds 100% allowance).
Generally, Capital Gains Tax
is payable by second or
holiday home owners when the
property is sold unless you
have owned the property for
22 years or longer.
Calculating whether there
has been a capital gain
involves deducting the
purchase price plus 10% from
the sale proceeds, less
agents commission and legal
costs. It is also possible
to deduct the costs of
renovating your French
property provided you have
kept proper receipts which
must include VAT. The longer
you have owned your French
property the less you pay
until you reach 22 years
where it dwindles to nil.
Try not to sell in under 2
years as you will not be
allowed to claim any of the
special allowances. There
are exceptions such as
pressing family reasons -
e.g.death. If your French
property becomes your
permanent home CGT will not
be payable after 5 years of
residence for at least 8
months in each year.
Under the double tax treaty
with France, if you are tax
resident in a country that
has entered into such an
agreement with France, the
agreement allows you to
credit any capital gains tax
paid in France against any
capital gains tax payable in
your tax domiciled country.
Inheritance Law and
Taxation
If you buy a property in
France, your ability to give
it away or to leave it by
Will is governed by French
Law. This gives your legal
heirs entrenched rights to a
certain proportion of your
French estate. This
proportion is known as the 'Réserve
Légale'. It is only the
remainder, the 'Quota
Disponible' that you can
freely give away by a
lifetime gift or a Will. To
explain this complex
situation it is probably
best to give an example.
Say, you are survived by one
child : in that case, you
can not give away any more
than half your French estate
either during your lifetime
or by Will. If you are
survived by 2 children then
this limit is reduced to one
third and to one quarter if
you are survived by 3 or
more children. Should you
have no children then other
members of your family may
qualify as legal heirs and
enjoy entrenched rights to a
proportion of the estate.
You cannot vary the share of
your French estate which
each of your legal heirs are
entitled to but you can
specify out of which parts
of the estate your legal
heirs can take their shares.
A husband or wife are not
legal heirs of each other
and have no rights to the
legal reserves. French law,
does however, allow you to
make certain disposals for
your spouse which go beyond
what he/she would be
entitled to if he/she were a
mere stranger.
A lifetime gift of your
French home or an interest
in it will attract gifts tax
(droits de donation)
similarly, on your death
your French estate will
attract succession tax (droits
de succession). After
various allowances, which
are decreasingly generous
from spouses to children,
the tax is charged in a
series of bands which are at
the time of writing 5% for
spouses. Children and
parents rising to 40% on
large assets, 35% for
brothers and sisters rising
to 45%. It is a complex
subject and specialist
advice should be sought.
One way of avoiding the
effects of French
Inheritance law is to set up
a company for the purpose of
buying the property. Such
companies are called 'sociétés
civiles immobilières' or
SCI. If you own shares in an
SCI, which owns the
property, you can dispose of
them in accordance with the
law where you are domiciled.
This will not lead to the
avoidance by your heirs of
inheritance tax it merely
means that you will be able
to dispose of the property
as you see fit. An SCI is
quite expensive to set up
and expert advice should be
sought before doing so.
Another way is to buy the
property jointly or 'en
tontine'. It is however a
complex process which is
extremely difficult to
unscramble once set up. It
quite simply means that on
the death of one partner the
property passes to the
survivor. Whilst it
mitigates the effects of
French inheritance law it
does not mean that
inheritance tax can be
avoided.
For Legal & Taxation advice,
International Mortgage
Network recommends that you
contact a specialist
international law firm:
