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Tax: Paying Tax in France

Blevins Franks – January 2006

The French tax rules and rates vary according to whether you are tax resident in France or not. You do not have a choice as to whether to pay tax in France or the UK, there is a definitive set of rules that comes into play to determine where you are tax resident. The four most important things you need to know with regards to residency and tax are:

1. If your main home (foyer fiscal) is in France, you will be deemed to be resident there, regardless of the number of days you spend in France.

2. If you spend more than 183 days (cumulative) of the French tax year in France you are tax resident in France. Days of arrival and departure are included in these 183 days. You are also considered French tax resident if you spend more days in France than any other country, even if this amounts to less than 183 days.

3. If you arrive in France with the intention of staying there indefinitely, you will be a French tax resident immediately – you will be liable to French tax from the date you set foot in France.

4. French tax residents are liable to tax on their WORLDWIDE income, gains and wealth, subject to any special provisions in the UK/France Double Tax Treaty (or the treaty with your home country if there is one).

The tax year in France is the same as the calendar year. France uses the ‘split-year’ approach so you can be resident there for part of the year, depending on when you arrive/leave.

Taxes are administered by over 120,000 tax agents as part of the Ministre de l’Economie et des Finances (Ministry of Finance). If you are tax resident in France you will deal with your local Hotel des Impôts (tax office). If you are a non-resident you have to deal with the Centre des Impôts des Non-Résidents. The address is 9 rue d’Uzès, 75094 Paris Cedex 02.

French taxes are declared a year in arrears. For example, any income earned in 2006 must be declared on your tax return due in the first quarter of 2007. The deadline is usually end of February/beginning of March but this year (for 2005 income) the forms will not be issued until May.

Income tax is not payable by PAYE, instead you pay the tax owed for one year in three equal instalments at the end of January, April and September of the following year. The tax paid is based on the previous year’s liability, with a final adjustment to reflect the actual liability in the current year. You can choose to pay the tax in monthly instalments over 10 months.

You do not need to register for tax, but you must ensure you return your annual tax return on time each year. It is your responsibility to obtain and complete a tax return each February. Do not wait to be given one by the authorities. You cannot argue that the reason you did not fill in a return was because you were not sent one.

Many people get the “carte de séjour” confused with registering for tax, but the concepts are quite different. The carte de séjour is simply a residence permit. It is actually no longer required by UK nationals, though some people still like to apply for one for use as an identity card. You would need to apply to your local prefecture, taking a copy of your passport and evidence of income, though now that they are no longer needed some prefectures are refusing to issue them.

The main tax return you fill in and submit each year is Form 2042. The re-designed forms from 2006 consist of a simplified Form 2042S DPR and a standard Form 2042 DPR. Both will be pre-completed with details of French earnings, pensions and benefits as well as name and address. The simplified form is for those who do not have any other form of income, and if the entries are correct they can simply sign the form and send it back. Supplementary forms are required if you have additional income, for example from lettings, or capital gains, or you have a liability to wealth tax or you have French income as a non-resident etc.

Remember that if you are resident in France you must declare your total income, which includes income received both in France and overseas, including offshore bank accounts. In practice the French system taxes the total income of the household, including the children’s income, so your declaration will cover your household’s combined income for the previous calendar year. If you fail to file your return on time you will be fined.

If you are non-resident, you need to declare all income arising in France, for example rental income to the Paris tax office for non-residents.

If you work in France on a self-employed basis or through a UK company you are required to register the business in France and obtain a SIRET number (business registration number).

The organization you register with depends on your business activity. Each business has its own category. Businesses come under four main categories: commercial activities; artisans; agricultural activities and liberal professions.

In all cases, a taxpayer’s dossier can be subject to an enquiry (contrôle) by the tax authorities. The authorities must send you written notice of an enquiry specifying the years they are looking into. The examination should last for no longer than 1 year, but may be extended in certain circumstances.

Where an individual has made all due returns and declarations, the enquiry window (délai de reprise) for income tax is three years after the year that gives rise to the tax liability. This enables the tax authorities to correct any omissions, under-declarations or errors made in calculating the tax due for the year.

Where fraud has been discovered and a penalty is being considered, the authorities can go back a further two years. This time limit can be extended to six years where there has been an undisclosed activity (activité occulte), i.e. where the taxpayer has not, within the prescribed time limits, made a tax return relating to the activity in question and has not followed the required registration procedures. This usually applies for business or corporate activities.

The maximum délai de reprise is 10 years, unless legislation has provided a shorter time limit. The 10 year period usually applies to gifts and associated transfer taxes.

If you transfer cash, shares or securities, out of or into France, without using a bank or financial institution as an intermediary you must report every transaction over €7,600 to the French Customs authorities.

You must also disclose details of all overseas bank accounts opened, closed or used during the year. Each bank account should be disclosed by using a separate declaration form at the time you submit your tax return. A penalty of €750 per account can be imposed for failure to do this.

Penalties for mis-declaration vary considerably and depend on whether the taxpayer has acted in good faith or not:

Good faith (no deliberate omission) - late payment interest only (no penalty) of 0.75% per month (9% p.a.), calculated on the amount of tax underpaid.

Bad faith (deliberate omission)- in addition to the late payment interest described above, a penalty of 40% of the tax is added. If the taxpayer is found to have acted fraudulently a further fine of up to €37,500 is imposed and a maximum 5 year sentence.

These penalties can be mitigated by cooperation.

As from 1st January 2000, foreign tax inspectors (including the UK Revenue) are allowed to carry out investigations within France. The EU Savings Tax Directive also means that the French tax authorities may be informed about bank accounts elsewhere in the EU.

In the case of a tax dispute, you will need to pay the tax before you fight the claim.

You will be well advised to use a tax adviser or local accountant for help with filing your tax return in order to ensure you get it right from the outset. If you continue to have finances in the UK, in particular if you will need to apply the UK/France double tax treaty, it would be sensible to use a tax adviser who understands both the French and UK tax rules, such as the Blevins Franks Tax Advisory Service. A local French accountant is unlikely to be familiar with all the ins and outs of English tax law. Remember that even if you become tax resident in France you may still be liable for UK inheritance tax if you have assets in the UK worth more than the Nil Rate Band (currently £285,000), which can get quite confusing as you will also be liable for French succession tax. Advance planning can make life a lot easier in this respect.

© Blevins Franks 2006

This article is reproduced with the kind permission of Blevins Franks.

For information and advice on tax issues, contact the Blevins Franks Tax Advisory Service on +44 (0) 207 015 2126 www.blevinsfranks.com

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