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French Tax Guide »
Capital Gains Tax Rules France
Please note that taxation is a complex subject and you should not take
or refrain from taking any step without full independent advice on the particular
facts of your case. The content of this article is of a general nature and no
liability is accepted in connection with it.
Q. How have the Rules changed?
A. Before 1st January 2004 the gain was computed
by the French resident taxpayer and included in their annual Tax Return Form 2042.
There was no deduction by the notary on completion and to a certain extent the
French Revenue relied on the honesty of the taxpayer. There was a special regime
for non-French resident taxpayers. The notary dealing with the sale deducted 25%
of the net gain made by non-resident individuals and 33 1/3 % made by non-resident
companies and paid it direct to the French Revenue. There were regular arguments
about whether invoices from non French VAT registered builders could be deducted
in working out the gain. The system has been simplified and both French and non-French
resident taxpayers are now broadly treated in the same way as non-residents i.e.
deduction by the notary on the sale.
Q. What are the new rates?
A. Good news here. The rate of CGT for both
French and non-French residents, who are residents of a EU, country is 16% of
the net gain. If you are French resident you pay an extra 10% in French National
Insurance making the effective rate 26%. In other words non-residents tax rate
has been reduced by 9%, which on the face of it should encourage more foreign
purchasers in France and will probably drive up prices. Once the 16% has been
paid the non-French resident individual taxpayer can have no further French tax
liability.
Q. From a tax perspective is French property
attractive as an investment?
A. Yes very much so. The popular perception
of France as a high tax country is out of touch with reality. In many cases France
is a lower taxing country than the UK and from a tax point of view an attractive
place in which to invest in property. The problem for UK investors is that UK
CGT rates are now much higher than French CGT rates as you will see from the example
below.
Q. What are the rates if you are not a
resident of a EU country?
A. The rate goes up from 16% to 33.3%. This
is subject to any applicable Double Tax Treaty, which may improve the position.
If you are not a EU resident and plan to buy a French property you need to think
about a suitable EU, and probably French vehicle to buy it in!
Q. Does it matter if you are say an Australian
national but a tax resident of the UK?
A. No, for these purposes the test is tax residency.
There is however a surprising sting in the tail for non-EU nationals who live
in a EU country and buy a second home in France. Under the new rules non-French
residents are exempt from French CGT on any sale of a property provided they have
lived in it and been French tax resident for at least 2 years at some time. You
do not have to be a French tax resident when you sell the property. You are only
allowed this exemption once and you can rent the property provide it is vacant
when you sell it.
Q. How does this affect a non-EU citizen
(say an Australian) who is a UK taxpayer?
A. Quite simply this two-year exemption does
not apply to them. However a UK citizen who is an Australian tax resident qualifies!
The rule seems illogical and unfair and I would like to hear from anyone faced
with this problem.
Q. Any other exemptions?
A. Yes. You are exempt from French CGT if you
are in receipt of an old age pension or are an invalid. This applies even if you
are a non-resident. This is subject to some fairly detailed conditions set out
in the tax code. There are a number of other more detailed exemptions. The main
residence exemption which is similar to the UK one and which can only apply if
you are French resident appears below.
Q. How is the gain calculated for individuals?
A. This is best illustrated by an example
(which is one given by the French Revenue). On 20th January 2004 an individual
sold a second home he bought 10 years earlier. No particular exemptions apply.
He sold for €120.000 and bought it for €60,980. When he bought the property
he had it rewired for €4,753 and changed the Central Heating the following
year for €1,206.
| |
Amount
in (€)
|
Comments |
Sale price
|
120,000 |
Agent’s costs can be deducted. Other deductions are very limited |
Purchase price
|
60,980 |
|
Purchase costs
(7.5% of 60,980)
|
4,574 |
7.5% is the default amount. You may be able to claim more |
Works
(15% of 60,980)
|
9,147 |
Default amount is 15% no proof needed. Otherwise very restrictive and need
proof |
Amended purchase price
|
74,701 |
|
Gross gain
(120,000 – 74,701)
|
45,299 |
|
Reductions (5 years)
(5 x 10% = 50% x 45,299) |
22,650 |
You deduct 10% for every year after the 5th. So after 15 years you pay no
tax |
Fixed allowance
|
1,000 |
€1,000 always deducted |
Net gain
45,299 – (22,650 + 1,000) |
21,649 |
|
Taxed at 16%
|
3,464 |
French and EU residents pay 16% non EU residents pay 33.1/3% |
National Insurance
|
2,165 |
French residents only pay this |
Q. Who works out the tax and pays it over?
A. The notary dealing with the sale. He is required
to complete a tax return and work out the gain. He pays the money to the French
Land Registry and if there is a problem the land may end up not being registered.
There is accordingly a lot of pressure on the notaries and I suspect in practice
if they have any doubts they will hold back money due to the seller until matters
are clarified. It is up to you to give him invoices for works. Although not in
the legislation the notaries have been told not to allow as a deduction any invoices,
which do not have a French VAT number on them. This is a problem for people who
have informal arrangements with British builders and suppliers. A hard line will
be taken here on the basis that the 16% tax is very low and UK owners are not
paying the extra 10% French residents have to pay. However, there seems no reason
to disallow costs incurred with bona fide British buildings and suppliers who
provide an invoice with a British VAT number of it. If you have any difficulties
please let us know.
Q. Do non-French residents still have to
appoint a French Inland Revenue approved tax agent to deal with their tax affairs
when they sell?
A. Previously you had to do this and the notary
held back money until your tax affairs were settled. You also had to pay the tax
agent’s fees which people resented as he was really working for the French
Revenue. This was where arguments about deductions of bills for works often took
place. This has changed now. If the sale is for less than E150, 000 no tax agent
is appointed. You simply fill in form 2090 which the notary will have. If the
sale price is over E150, 000 you still need a tax agent. If you have owned the
asset for more than 15 years there is no tax agent regardless of price.
Q. What about a main residence?
A. This is exempt broadly as in the UK. If the
property is entirely residential but you run a business from it, it is still exempt.
However if parts of the property are used exclusively for business purposes then
only the private part qualifies for the exemption.
Q. If I have two properties in France how
do they decided which one is my main residence?
A. Normally it is where you are most of the
time. If in doubt it is where you claimed your reduction for taxe d’habitation
(local rates) as a main residence.
Q. My house has various outbuildings, which
I want to sell separately. Are they exempt?
A. They can be if the outbuildings are “next
to and necessary to” the main private residence. The rules here are different
from the UK ones. An important condition for exemptions that the house must be
sold at the same time as the outbuildings though not necessarily to the same person.
It is likely to be easier to have it exempt if it is seen as part of the garden
rather than a building.
Q. How does this tie in with UK CGT?
A. It is likely that French CGT will be nil
or far less than UK CGT. There are other French CGT exemptions for instance for
landlords of furnished properties who have owned them for 5 years. You are taxable
in the UK on any French gain if you are resident or ordinarily resident in the
UK. There are exemptions from UK CGT for non-UK domiciled individuals who do not
remit the sale proceeds to the UK. Similar planning incidentally applies to avoiding
UK income tax on the rental income from the French property. Tax planning for
UK investors who have seen sharp rises in French property over the last few years
focuses on avoiding or mitigating the UK liability. I can assist here though the
detail is outside the scope of this article.
Q. It seems unfair that I pay no Capital
Gains Tax in France but 40% in the UK. How is the UK gain calculated?
A. Agreed in many parts of France this is
a serious problem. Many UK investors in say the Alps have made staggering gains,
which are exempt in France but potentially taxable at 40% in the UK. UK CGT is
worked out using UK rules. You cannot claim any French exemptions. Taking the
example given above the UK CGT in pounds will be calculated as follows (£1
= €1.40 used throughout for simplicity):
| |
Amount
in (£)
|
Comments |
Sale price
|
85,715
|
|
Purchase price
|
43,557
|
|
Purchase costs
|
3,267
|
I have used the French figure, as this is likely to be close to real figure |
Enhancement costs
|
6,533
|
I have used French figures. NB. UK Revenue may want actual figures |
Gain before indexation
|
32,358
|
|
Indexation
|
43,557
+ 3,267
+ 6,533
= 53,357
@15% = 8,004 |
From January 1994 (141.3) to April 1998 (162.6)
162.6
- 141.3 = 15%
141.3
|
| Chargeable gain |
24,354
|
|
Taxable gain after non business Taper relief
|
24,354 @ 80%
= 19,483 |
From 6 April 1998 to 20 January 2004 = 5 complete tax years plus bonus year
= 20% |
Annual Exemption
|
7,900 |
2003-2004 = £7,900 |
Taxable gain
|
19,483
– 7,900
= 11,583
|
French and EU residents pay 16% non EU residents pay 33.1/3% |
Charged to CGT
|
11,583 @ 40%
= 4,633 |
Taxed as top slice of income assumes you are higher rate UK taxpayer |
Set off French Tax Paid 2,474
|
Additional payable in UK
4,633
– 2,474
= 2,159
|
This is the additional amount you pay the UK Revenue |
Q. I want to buy and sell regularly. I
also want to divide up land into plots and do some new build.
A. You are likely to be outside these rules.
You are likely to be classified as a marchand des biens i.e. a property dealer
which puts you under a different (and higher) taxing regime. There is the temptation
to try to come within the new rules here but it is high risk. You may get away
with it if the development is small and the overall sale price is less than €150,
000 so no tax agent is appointed and you have an understanding notary! The best
advice is not to chance it. You will probably be better off using a UK company
and relying on the UK France double tax treaty.
Q. I am interested in “turning”
(i.e. selling a contract on before completion) some new build contracts on a new
development of Paris apartments.
A. With sharp price rises in better Paris postcodes
last year and no notary fees investors in this market certainly got sparkling
returns! This is a specialist area though the use of an offshore company in a
country with a suitable double tax treaty with France is likely to be the way
forward.
Q. I understand the new rules only apply
to sales of private property as opposed to property used for business purposes.
Sales of property used for business purposes are taxed under the business capital
gains rules (regime des plus-values professionnelles).
A. This is correct in most cases.
Q. What is the position if you rent furnished
property, which is trade in France, and are taxed under Micro-Bic? Are you within
the new rules or the professional regime?
A. The new rules apply to you so long as you
are not a “professional landlord” i.e. have registered with the Commercial
Registry and generate a certain income. The rules on taxing professional landlords
have changed slightly for 2004 but essentially the property is still exempt from
French CGT after 5 years of letting. It is accordingly likely to be better to
register as a “professional landlord” but advice in this area is essential.
Q. What happens if I have elected to pay
income tax under one of the “Real” regimes rather than Micro-Bic?
A. This depends on whether you have put the
property on your balance sheet (bilan). If you have done this then you will pay
CGT on a sale of the property under the professional CGT regime, if not you are
likely to be taxed under the new regime.
Q. I understand certain companies and trusts
come within these the new Rules and the shareholders or partners are taxed as
individuals i.e. the company is transparent for tax purposes. Which ones are they?
A. Things start getting a bit more complicated
here, which also means more good tax planning opportunities, are thrown up! Essentially
these are companies, which are not subject to French corporation tax. They are
generally viewed as transparent for tax purposes similar to English partnerships.
They are called “societes de personnes”. They include SCIs, SARLS
which have elected for personal as opposed to corporate taxation and regardless
of any election the sole shareholder of a SARL who is an individual. This will
extend to non-French companies, which French law classifies as having the requisite
characteristics. The new rules cover either a sale of a property by such a company
or the sale of shares in such company, which broadly is a property company. There
is a problem with SCIs if they, say, carry out furnished lettings, which is taxed
as a trade in France because they cease to be tax transparent.
Q. So the French Revenue looks through
the company and taxes the underlying owners of the company direct?
A. Broadly yes. If the societe de personnes
has its registered address (siege) in France it probably will be French resident
under a relevant Double Tax Treaty. The shareholders or partners, whether or not
French resident, will be taxed accordingly to their shares as a French resident.
No tax agent under is needed. This also applies if the partner is not a EU resident.
The partner then is only taxed at 16% not 33.3%. This advantage should not be
overlooked when structuring non-EU property investment into France.
Q. What happens if the tax transparent
company has its registered office outside France?
A. If the societe de personnes has its siege
outside France then this means tax at 33.1/3% is paid if the partner is not a
EU resident individual. You pay the 33.1/3% if you are not EU resident even if
you are a EU national. The tax position and different rates are summarised below.
I have also indicated whether you need to appoint a French Revenue approved tax
agent to finalise your affairs before the notary can release all the sale proceeds
to you.
| Individuals |
| Taxpayer |
Rate
|
French
NI |
Tax
Agent Yes/No |
| 1. French resident |
16% |
10% |
No |
2. EU resident (any nationality)
|
16% |
0% |
No1 |
3. Resident outside EU
|
33.3% |
0% |
No1 |
| Tax Transparent
Company Resident intside France with Gains taxed direct on individual
Shareholders/partners |
| Taxpayer |
Rate
|
French
NI |
Tax
Agent Yes/No |
| 1. Partner French resident |
16% |
10% |
No |
2. Partner EU resident
|
16% |
0% |
No |
3. Partner resident outside EU
|
16% |
0% |
No |
| Tax Transparent
Company Resident outside France with Gains taxed direct on individual
Shareholders/partners |
| Taxpayer |
Rate
|
French
NI |
Tax
Agent Yes/No |
| 1. Partner French resident |
16% |
10% |
No1 |
2. Partner EU resident
|
16% |
0% |
No1 |
3. Partner resident outside EU
|
33.3% |
0% |
No1 |
| Individuals |
| Taxpayer |
Rate
|
French
NI |
Tax
Agent Yes/No |
| 1. Resident in France |
Applicable Corp tax rate |
No |
2. Resident outside France
|
33.3% |
- |
Yes1 |
No1 - If less than €150,000
Yes1 - Any Price |
|
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