Tax Facts - France

Introduction

Taxation in France is at a national level, although the monies are collected by local tax offices (le centre des impôts). The tax regime in France is controlled by the Tax Administration.

Tax Year

1st January to 31st December

Assessment Basis

French resident taxation is based upon worldwide income on a self- assessment basis. In France the family unit is taxed and as a general rule married couples cannot submit separate tax returns.

The total liability of income tax and wealth tax is capped at 85% of net taxable income. In addition, the total amount of income tax, regional and municipal taxes assessed on the main household, and wealth tax, may not exceed 60% of net taxable income earned in the prior year.

Income Tax

The main tax in France is the impôt sur le revenu. A French resident’s tax liability is determined through the ‘income splitting’ or ‘unit’ system, whereby the total taxable income of a family group is divided into a number of units (dependent on the number of family members). The calculated tax liability applicable to a single unit is then multiplied by the total number of units to arrive at the total amount of tax payable.

Tax is charged at progressive rates up to a maximum of 40% on all employment income after deducting mandatory social security contributions, and a standard allowance for professional expenses of 10% of taxable employment income up to a cap of actual documented expenses.

There are other allowances and deductible expenses that are either deducted from taxable income or reduce the amount of tax payable. These allowances and deductions are given for items such as alimony, major equipment expenses, charitable donations, child care expenses, schooling expenses and domestic help expenses.

French resident income tax is not deducted at source by the employer but is payable in either three or ten instalments over the fiscal year.

Taxation of Investment Income

Generally, a French resident is liable to French income tax on investment income and is taxed at progressive rates. From January 1, 2005, only 60% of investment income is taxable and there is a small tax free allowance for French-source dividends as well as dividends sourced from states with which France has a tax treaty, and on interest on advance loans received by partners.

In addition, French tax residents with income from certain fixed-return investments may elect for 16% tax to be withheld at source at the time of receipt, and not be subject to any further taxation ('prélèvement libératoire'). This income must, nevertheless, be reported on the personal income tax return.

Investment income is also subject to CSG, CRDS (see social security for rates) and 2.3% social tax.

Tax on Property Rental Income

Rental income forms part of taxable income after deductions for various expenses such as repairs, property taxes etc. Rental losses are also deductible up to a certain level from other forms of income and thereafter from rental gains only. Further tax breaks are available depending on the type of property leased.

A further contribution of 2.5% is due by lessors receiving rental income derived from a property over 15 years old. Certain exemptions from this additional liability exist.

Wealth Taxes

A wealth tax applies to households whose net assets exceed a certain value as at 1 January each year. French residents are taxed on their worldwide assets, except for property holdings outside France unless exempted by a tax treaty, whilst non-residents are taxed only on the value of their French located assets. Business assets, antiques and works of art are exempt from wealth tax. The rate levied is progressive, from 0.55% to 1.80%, and applicable to wealth over and above a tax free allowance. See above for information on tax cap.

Capital Gains Tax

Capital gains derived from the sale of a principal residence are tax-free and, if certain requirements are met, the capital gain realised on the sale of a secondary residence by taxpayers not owning their principal residence may be tax-free. Gains from property are treated as taxable income and are taxed at income tax rates, after deducting various allowances depending on the duration of ownership.

Capital Gains Tax

A tax- free allowance exists for the capital gain derived from the sale of shares and once this is breached the whole of the gain is liable to a fixed rate tax of 16% plus CSG and CRDS (see social security contributions) and a 2.3% social tax. Capital losses on the sale of shares are creditable against capital gains of the same nature. Losses can be carried forward for five years.

Inheritance and Gift Tax

French inheritance or gift tax is payable by beneficiaries of gifts or inheritances. If the deceased or the donor is a tax resident of France, tax will be due in France on worldwide assets.

If the deceased or donor is not a tax resident of France, tax will be due on worldwide assets transmitted to the beneficiary if the beneficiary has been a tax resident of France for at least six out of the last ten years.

Regardless of whether the donor or beneficiary is tax resident of France, tax will be due on all personal and real property located in France.

Inheritance tax is levied on assets at their fair market value, with allowances taking into account the relationship between the deceased and the beneficiary. Debts existing at the time of death are deductible in full.

The gift tax regime follows the same principles but looks favourably on gifts made during the lifetime of the donor and tax free allowances exist for transfers between parents or grandparents and children.

The tax is levied at various rates ranging from 5% to 60%, depending on the relationship between the donor and the beneficiary and certain allowances. Reductions in the tax payable are available if certain conditions are satisfied.

Regional and Municipal Taxes

A habitation tax or <<taxe d'habitation>> is levied on any individual who occupies a dwelling on 1 January, even if he is not the owner or a French resident. The tax is levied on a deemed rental value and specific deductions are granted according to the number of dependent children.

Property Taxes

The owner of a property pays the ‘taxe fonciere’. The rate depends upon the facilities of the building, any improvements made and on the quality of the building. Various exemptions and exclusions exist.

Stamp Duty/Transfer Tax

Registration duties are applied on the purchase of properties that are not subject to Sales Taxes. The duties are charged on the market value of the property or purchase price if higher at a rate of 5.09% (from 01/01/2006). The purchase will be subject to departmental duty up to 3.6%, municipal duty of up to 1.2% and surtax of up to 0.09%. Other charges and notaries fees bring the cost of purchase to between 7% and 8% if financed by a mortgage.

Other registration duties apply when disposing of capital shares (5%) or common stock (1.1%, capped at €4,000 per transaction), selling all assets of a business (5%), as well as the transfer duty and some fixed duties. Stamp duty has been abolished whilst tax on certain credits has been created, starting from €6 up to €54 depending on the amount of the opened credit facility.

Sales Tax

Sales tax of 19.6% is generally added to the sale price of goods and services including property less than 5 years old. Some sales are exempt from sales tax or taxable at a reduced rate.

Social Security Contributions

The French social security system is composed of various schemes providing a wide range of benefits. Contributions are shared between employer and employee, with employees on average contributing 15% plus CSG1 and CRDS2. Contributions are assessed using various ceilings; the average rate will decrease as the gross salary increases.

French tax residents are liable to CSG and CRDS on 97% of their gross employment income.

These levies are also due on 100% of other types of income (investment). The current rates are 7.5% (8.2% for investment income) for CSG and 0.5% for CRDS. Investment income is also liable to a 2.3% social tax.

1 CSG - Generalized social security tax

2 CRDS - Contribution to the Reimbursement of the Social Debt

Taxation of Expatriates Living in France

If an individual is deemed to be a non-resident of France for tax purposes, they will only be taxed on their French sourced income.

Non-residents liable to French personal income tax on employment income are, in contrast to residents, subject to withholding tax.

Following deduction of the mandatory French employee social security contributions (excluding any CSG & CRDS paid) and the standard 10% salary deduction, employment income is then subject to withholding tax at source by the employer at the rates of 12% and 20%.

The 12% withholding tax is a final non-refundable tax. However non-residents are still liable to the progressive income tax rates of tax, applicable to residents, on any remuneration subject to the 25% withholding tax. If the resulting tax is higher than the 20% withholding tax, the 20% withholding tax levied by the employer is offset but an additional income tax is due by the employee. If the resulting tax is lower, the total withholding tax is the final tax liability of the employee. Under certain conditions and in very limited cases, refunds of withholding tax can be claimed.

Recent reforms of the tax regime have introduced tax exemptions for various amounts paid in excess of base salary to expatriates on temporary assignment in France. The new law, which came into effect on 1 January 2004, is applicable to employees of foreign companies coming to France for a limited period (i.e. six tax years) and who have not qualified as a French tax resident during the ten calendar years preceding the year in which they commence their assignment in France.

In respect of social security contributions France has entered into agreements with more than 40 countries. Under these agreements where expatriates are temporarily transferred to France they may remain under their home country social security schemes.

Taxation of ‘Non-Residents’ Living in France

An individual is deemed as a French resident for tax purposes if:

· They have a home in France or, if they have no home in France or abroad, France is the principal place of abode; or

· France is the place where they perform principal professional activities; or

· France is the centre of their economic interests.

Only one of these criteria needs to be met in order to qualify as a French resident for tax purposes.

Allowances and annual progressive tax rates apply in the same way to part-year and full-year tax residents. However, because of French income-splitting rules, a married taxpayer with children may not reach the maximum marginal tax rate during their first year in France. Thus, there may be a significant benefit to an expatriate in shifting income into the first year or last year of the assignment depending on the date of arrival/departure.

When a French tax resident leaves France during the course of a tax year, they remain liable to French personal income tax on the aggregate of world-wide income earned as a French tax resident and also their sole French-source income earned as a non-French tax resident, subject to the provisions of an applicable tax treaty.

If an expatriate working in France is considered to be a resident in both France and in their home country, reference will be made to the relevant tax treaty, if any, to determine the country in which the individual will be regarded as resident.

France has an extensive network of double taxation treaties with over 110 negotiated.