|
French Tax Guide » French Property Investment & Trading
Imaginary conversation between a UK resident
investor and property dealer who has built up a UK portfolio and is planning
a move to France in a few years time and David Anderson solicitor and Chartered
Tax adviser on the tax position of investing in and developing French residential
property.
Q. I want to start dealing in property is France. This will start
with renovatinq properties How is this taxed?
A. You will be treated as carrying on a trade of development in France and
will be taxed at 50% on the profit.
Q. Is this how local French developers are taxed?
A.
Property dealers are classed as “marchands de biens” or traders
in France. The tax they pay is approximately the same. You could always form
a French company and be taxed as one of the locals.
Q. Is there a way around this?
A. Yes you can buy and sell the property using a UK company. The tax rate
on a UK company is likely to be very much lower and you may have such a company
available. It also means that you do not have to extract any money from a UK
company you may already have either as salary or dividends at an additional
UK income tax cost.
Q. But won’t the Company be trading in France and be taxable
there?
A. It will be trading in France but if it does not have a permanent establishment
in France. The UK France Double tax Treaty exempts the UK company from French
tax in such circumstances. The good result is that the company is taxed only
in the UK.
Q. So it's very important for the UK Company not to have a permanent
establishment in France?
A. This is essential to avoid the excessively high French tax. The tax saving
is likely to be at least 30%.
Q. What is a permanent establishment?
A. This is a tricky question. It is easier to say what it is rather than what
it is not. A sales or site office will be a permanent establishment. In some
cases a desk in a corner of a room has been viewed as a permanent establishment.
It is important that the documentation clearly shows no intention to create
a permanent establishment.
Q. So how will I run the development?
A.
The structure will have to show that the company carries out its trade in France
through an appointed independent agent. The agent must not be connected
with the company and should be paid at the local going rate. Typically the agent’s
powers are very restricted to day-to-day matters and all major decisions and
payments for supplies are made from the UK company.
Q. Assuming I am or become resident in France can I still use a UK
company and this structure with say the UK company appointing me as the local
French agent?
A. Yes though the way the UK company is set up is important to avoid the French
authorities assessing it on the basis it is fully taxable in France. You would
be able to deal with routine site matters only.
Q. What other practical snags are there?
A. It is important that the notary you use to carry out the conveyancing is
aware of the double tax treaty to avoid the notary withholding 50% of the profit
subject to you getting a tax clearance. You must always bear in mind that notaries
are not the same as English solicitors in an important respect. They are public
officials, appointed by and directly responsible to the French Government, and
have a roll as tax collectors. Accordingly most are reluctant to suggest tax
planning and take a very cautious line.
Q. Apart from the development business I want to build up a portfolio
of rented properties in France. How will I be taxed on the income?
A. The income will be taxed in France. You will have the usual deductions
for mortgage interest, repairs and the other outgoings in a similar way as in
England. The rate applicable is 25%. The income should also be included in your
UK tax return as it is subject to UK tax as well, though a credit is given for
any French tax paid.
Q. Does it make any difference if I rent furnished or unfurnished
property?
A. Yes. Unfurnished property is treated as non-commercial income whilst rented
property is treated as commercial. They are taxed in different ways.
Q. Any other tips?
A. Yes, be careful
if you buy a property to rent out furnished using an SCI. SCI’s should
not be used for commercial purposes and if they receive income from furnished
property this may have adverse tax consequences.
Q. How does the UK Revenue work out the net income on my French property?
Do they use the French net income figure or do I need to do a further computation
using the UK rules for deductions?
A. You work out the net rent using
the same principles as for the letting of a UK property. You ignore the special
UK rules for furnished holiday lettings.
The “foreign” part of the UK annual tax return takes you through
the computation. In other words the net figure you get for UK tax will be different
to the net figure you have already paid tax on in France. However if your property
income is less than £15,000 pa then you do not have to break down your
expenditure and in practice the same figure as for net income in France is probably
accepted by default by the UK Revenue.
Q. Does it make any difference if I move to France?
A. Obviously no UK tax return will need to be filed. However French national
insurance may be levied on the rents. This does not happen whilst you are resident
in the UK as you are then outside the French National Insurance net.
Q. If I am in France and still have a UK company can I use this company
to receive tax-free income and other benefits?
A. Yes. This is a very useful planning area, which is often sadly completely
overlooked by expatriates in France. You need expert advice here.
Q. Once I am in France I may want to sell some of my UK properties
and reinvest into French property. Will I have to pay any capital gains tax
either in the UK or France?
A. There should be no UK CGT to pay, as you will be non-resident for UK purposes
assuming you do not return to the UK within 5 years. France however taxes its
residents to French CGT on a worldwide basis. It is however possible to avoid
the French capital gains tax and so pay no CGT in either country. This is a
very powerful tool for but you need professional advice.
Q. Once I am in France how will I be taxed on my rental income from
my UK properties?
A. Properties owned in a UK resident company would only be taxed in the UK.
Any properties in your personal name will be taxed in the UK under the non-resident
landlord scheme at 22%. The income needs to be included in your French tax return
and is taxed with a credit for the UK tax paid.
Q. How is the income computed for French tax purposes? Can I just
use the UK net figures or do I need to recomputed using the French rules?
A. The French Revenue generally accepts the UK net figure.
Q. Any other thoughts on this?
A. Yes. Think carefully about putting your UK properties into an offshore
trust before you arrive in France. This can be helpful in keeping the assets
out of your name for not just income tax but also CGT and Inheritance Tax..
This article is by David Anderson a Solicitor
specialising in taxation. This is intended only as a general guide and should
not be relied upon without
professional
advice on the facts of your particular case. He is a Chartered Tax Advisor
and has extensive experience in setting up tax effective structures for investment
into France. Article Copyright © 2003
Sykes Anderson LLP and SAFS Ltd.
Please note that your taxation enquiry will be passed to Blevins Franks Tax Advisory Service, who will contact you shortly.
Request Taxation Assistance and Quote
|
