France has much the same taxes (e.g. income tax, capital gains tax, property tax) as other countries. However, there are three main differences between France and many other countries:
- In most English-speaking countries (e.g. UK, USA, Canada) income tax and social taxes are calculated on an individual basis. In France, they are calculated on a family basis. This is explained in more detail below, but in simple terms the income for all family members is added up and then divided by the number of people in the family.
- Tax rates in France are different and generally higher than most other countries.
- There are a number of tax loopholes and exemptions specific to France.
These three factors mean that some people see a large increase in taxes when they move to France, some see a large decrease, and some see little change. The main factors that determine which category one falls into depends on where one comes from (e.g. USA has relatively low taxes, so people moving to France from USA generally see an increase in taxes) and on individual circumstances (large families tend to benefit from reduced taxes while single earners often see increased taxes).
Following is an explanation of various taxes and how they are calculated:
- TVA (VAT or sales tax)
- Taxe Foncières, Taxe d'habitation (Property tax and habitation tax; equivalent to UK council tax)
- Income tax
- Capital gains tax
- Social taxes (CSG, CDRS)
- Inheritance tax
- Gift tax
- Wealth tax
- Corporate and Business taxes
- Assorted other taxes
For simplicity, everyday language has been used rather than the formal, lengthy and complex legal terminology. Furthermore, items which are of limited interest have been omitted, also in the interests of simplicity. Consequently, the following is a general guide only and not a definitive statement. No actions should be taken or avoided on the basis of the following (see Terms & Conditions); such decisions should only be made after receiving advice from qualified professionals who are fully informed of your individual circumstances and current tax rules.
If you are resident in France, you must pay French taxes on your worldwide income. However, if you are not resident in France, you pay French taxes only on income earned in France. This is much the same as UK tax law (i.e. if you are resident in the UK you must pay UK taxes on your worldwide income whereas if you are not resident in the UK you pay UK taxes only on UK income).
If you are resident in France from a tax perspective, you are referred to as 'tax resident in France'. In general, French tax law considers you to be 'tax resident' if you meet any of the following criteria:
- your principal residence is in France, or
- you carry out a professional activity in France (unless you can prove that this activity is carried out therein incidentally), or
- your centre of economic interest lies in France.
There are a number of specific tests associated with these general principles. For example, if you spend 183 days or more in France in a calendar year, then your principle residence is deemed to be in France. These specific tests are used when it is unclear which country you are 'tax resident' in. For example, if you spend half of your time in France and half of your time in the UK, it is possible that both countries will claim you as tax resident, in which case the specific tests will be used to determine which of the two countries you are actually tax resident in. If your situation is unclear, you may wish to take professional advice on this matter.
When determining taxes, it is tax residency which is important rather than citizenship (with a few special exceptions, such as diplomats). Consequently, if you live and work in France you will pay the same taxes as any Frenchman (or woman), regardless of your citizenship.
If you earn money in multiple countries, you will need to pay tax in multiple countries. To avoid the situation where you are taxed twice, many countries (including UK and France) have a 'double taxation treaty'. This can best be explained by two examples:
- Tax resident in UK, earn money in both UK and France. This situation could arise if you live and work in the UK but have a rental property in France. In this case, you would have to pay tax in France on the rental income earned in France. You would also have to tax in the UK on both UK income and on your France income. However, to avoid being taxed twice on the same income, you would receive a tax credit in the UK equal to the tax you paid in France.
- Tax resident in France, earn money in both UK and France. This situation could arise if you live in France but have an investment or other income in the UK. In this case you would have to pay tax in the UK on the income earned in the UK. You would also have to pay tax in France on both the UK income and the France income. However, to avoid being taxed twice on the same income, you would receive a tax credit in France equal to the tax you paid in the UK.
If you have income from countries other than the UK and France, you should check whether France has a 'double taxation treaty' with these other countries. For UK assets and income, you are protected as there is a double taxation treaty between the UK and France. However, for countries where such treaties are not in place, you can be taxed in both countries for the same income. This can literally double (or more) your tax bill. Furthermore, you may be subject to this double taxation even if you are non-resident in France and you can even be taxed on the letting value of your French property even if you are net letting it (in other words, you can be be required to pay substantial income tax even if you have no income). Consequently, it is of the utmost importance that you confirm your double taxation situation and take appropriate professional advice if your income and assets are not protected by double taxation treaties.
Types of Tax
In France, as in the UK, there are many different taxes. In both countries, these can be grouped into two categories:
- Taxes that can be ignored. There are many taxes associated with the sale of specific products; these taxes include: alcohol tax, cigarette tax, petrol tax, stamp duty, and many more. Unless you own a business, you can safely ignore these taxes because:
1) You have no responsibility in terms of these taxes. It is the complete responsibility of the business selling the products to calculate, collect and pay them.
2) Opportunities to avoid or reduce these taxes are very limited or non-existent, short of illegal tax evasion or simply not purchasing the products.
- Taxes that need action. There are a number of taxes which one should understand and take appropriate actions in regard to. There are three basic reasons for this:
1) A number of taxes are the individuals responsibility to pay (e.g. the TV license fee) and if the individual does not pay them by the due date they are subject to fines and other penalties.
2) For some taxes the individual is not only responsible for paying them, but also for providing the information and documentation to the tax office so that the tax office can calculate the amount due. An example of this is income tax.
3) For most taxes (at least, most taxes in France) there are legal means to reduce the amount of tax due and thus the amount that must be paid.
As the first category (taxes that can be ignored) is of little interest, this page will concentrate on taxes that fall into the second category.
TVA (VAT or Sales) Tax
In France VAT (Value Added Tax, or sales tax) is known as TVA (Taxe à la Value Ajouté) and it works much the same way as in the UK. The standard rate for TVA is 19.6%, but as in the UK certain items are taxed at a lower rate (for example, some food items are taxed at only 5.5%).
Most items that you purchase for your home will be taxed at 19.6%. However, if you purchase professional services at the same time, you will generally be taxed at only 5.5%. You save 14.1% simply by ordering the labour at the same time as the materials. I recently had a plumber charge me 20 euros to install a 200 euro radiator. If I had purchased the radiators and installed them myself it would have cost 239.2 euros (200 euros at 19.6% tax) whereas having a professional plumber do the work it was only 232.1 euros (220 euros at 5.5%). It was cheaper to have a professional do the work than to do it myself!
This 14.1% saving is available on most products that you would buy for your home. However, before making any decisions on this basis you should check that:
- the tax saving is applicable to the particular item you are purchasing, and
- the professional is charging you the same price for the materials as if you were purchasing them yourself.
Taxe Foncières, Taxe d'Habitation
Council tax in the UK is based on the value of the property and the number of people living in it. In France, this is broken down into two separate taxes: a property tax (taxe foncières) and a residence tax (taxe d'habitation). The owner of the property is liable for the taxe foncières, while the occupier is liable for the taxe d'habitation; if you are an owner-occupier then you are liable for both taxes.
As in the UK, property tax varies from region to region, so identical properties can have very different levels of property tax depending on where they are located. Likewise, a city property will be taxed more than the equivalent property in a village or the countryside.
Residence tax depends on the number of people living in the house or apartment. Like property tax, it varies from one area to another. People over 60 are eligible for exemptions.
In the case of a house being sold, the person owning the house as of 1st January is liable for the full year's taxe d'habitation. However, if a house is purchased partway through the year, the taxe foncières is often split between the buyer and the seller. If you do not confirm this (in writing) at the time of the initial contract (Compromis de Vente), you may be required at the time of the final contract (Acte de Vente) to refund to the vendor's the taxe foncières they've already paid for the balance of the year.
If you are tax resident in France, your income tax is calculated on the basis of your worldwide income. If you are not tax resident In France, your income tax is based only on income earned in France.
Income tax is subject to a number of deductions, where the deductions available depends on the source of income and the amount of income. For example, when calculating rental income, one has the choice of deducting the actual expenses or of deducting a flat rate of 40% of the income. However, this choice is only available if the level of rental income is under €15,000.
There are seven different categories of income, each with different rules in terms of how tax is calculated and what tax allowances are available:
- business profits,
- professional profits,
- agricultural profits,
- real property income,
- wages, salaries, pensions and annuities,
- income from transferable securities, and
- capital gains.
Once you've decided which category or categories you are earning income in, you may wish to discuss the various deductions available with your local French tax office or get professional advice in order to determine the best approach to minimising your tax liability.
When calculating profit, you will often have the choice of deducting your actual expenses from your income, or deducting a standard percentage. For example, if you earn less than €15,000 from property rental, you can either deduct your actual expenses from your income or simply deduct 40% of your income. Likewise, for wages and salaries, you can either deduct expenses associated with earning the salary (e.g. the cost of driving your car to and from employment) or you can deduct a flat rate of 10% from your income. Consequently, you can minimise your taxes by choosing the higher of either real expenses or the flat rate allowances.
France also has a number of other substantial allowances which are not available in the UK tax system. For example, a resident of France can deduct 50% of the cost of domestic help (a nurse, cook, driver, etc.) up to €12,000. This gives a potential deduction of €6,000 (50% of €12,000). Note that this deduction is against tax due rather than income, so it is a potential direct tax saving of €6,000 rather than merely a reduction of taxable income by this amount. For each person in the household over 65 there is a further increase of €1,500, for up to two people, taking the maximum tax saving to €7,500 (50% of €15,000).
The tax year in France runs from 1st January to 31st December (unlike the UK, where the tax year is April to April of the following year). Unlike the UK, income tax is not paid as income is earned (the UK PAYE scheme), but is paid the following year. For example, one would pay in March 2005 for the income earned during 2004 (it is also possible to pay tax in instalments rather than all at once).
It is the responsibility of the individual to declare his/her income and make the corresponding payments (i.e. tax is based on self-declaration). A tax declaration form can be obtained from the local tax office and employees receive from their employer a form stating their taxable income. If you are earning income in France (e.g. from letting property) you must make an income tax declaration in France for this income, even if you are not resident in France.
Calculation of Income Tax
In France, income tax is based on family income rather than individual income. In other words, if the husband and wife both work, rather then each submitting a tax return and paying tax individually, tax is calculated on their joint income, with tax relief then being applied depending on the number of people in the family.
The procedure for calculating income tax is as follows:
- Add up all your sources of income to determine your total income
- Deduct social taxes (CSG, CDRS) which have been paid and deduct applicable allowances, to determine your net income.
- Divide the net income by the number of family units (husband and wife each count as one unit, the first two children count as half a unit each, the third and subsequent children count as one unit each) to determine net income per family unit.
- Use the following table to calculate the income tax per family unit.
|Income after deductions, divided by family units
|Up to €4,262
|€4,262 to €8,382
|€8,382 to €14,753
|€14,753 to €23,888
|€23,888 to €38,868
|€38,868 to €47,932
- Multiply the unit income tax by the number of family units to determine the gross tax.
- Subtract any tax reductions and tax credits to which you are entitled, to determine your net tax (what you actually have to pay).
If this seems complicated, don't worry. You are not expected to calculate your tax. All you need to do is provide your income information on the tax form (déclaration de revenus) and the French treasury will calculate your tax and send you a tax notice stating how much you need to pay.
Capital Gains Tax
Profits on the sale of assets (e.g. property or equities) are subject to capital gains tax. However, certain items are exempt from this tax. For example, if you sell your home in France (assuming it is your principal residence) you do not need to pay any tax on the profit. Furthermore, even for taxable items, you do not need to pay tax if your profit is less than a given amount.
For items which are taxed, the profit is not merely the difference between the selling price and the purchase price, as there are a number of allowances, such as:
costs and expenses associated with the purchase,
costs and expenses associated with the sale,
certain expenses during the period of ownership,
additional discounts associated with property. For example, after five years of property ownership, there is a 10% allowance for each subsequent year of ownership (e.g. after 10 years ownership tax is reduced by 50%; after 15 years ownership any profit on sale is tax free).
For calculation of this tax, there are two main types of assets. The first type is property (e.g. a house, an apartment, or land) and the second is securities (e.g. shares). For both of these asset types, the tax rate also depends on whether you are resident in France or non-resident. This results in four different tax rates for capital gains by individuals, as follows:
- France residents, capital gains on property. This is taxed as income. In other words, it is added to your other types of income and then income tax is calculated on it. As discussed above, some items (e.g. sale of your principal residence) are exempt from this tax.
- Non-residents, capital gains on property. If you resident in another EU country (e.g. the UK), the profit is taxed at a flat rate of 16%, plus social taxes (see CSG and CDRS below). If you are not a resident of a EU country, the tax is one third of the profit (i.e. taxed at a flat rate of 33%).
- France residents, capital gains on securities. Profits are taxed at a flat rate of 16%, plus the social taxes (see CSG and CDRS below).
- Non-residents, capital gains on securities. In general this is tax free in France (there are some exceptions, such as in the case of a shareholding of 25% or more in a private limited company). However, the county in which you are resident may tax you on this profit.
As of 2004, there have been a number of changes to the way in which capital gains is calculated. Of particular note, one can no longer deduct expenses for materials unless there is a professional invoice. Consequently, any materials used in DIY work may not be deductible. However, you may still want to keep your material invoices anyways, as it is not impossible that this tax change could be reversed again at some future point.
Social Taxes (CSG, CDRS)
CSG (contribution sociale généralisée) is a tax which is specifically used to fund certain social security and health care costs. For most income and capital gains, it is set at 7.5%.
As the French social security system is in debt, another social tax was created to repay this dept. This tax is set at 0.5% and is known as CDRS (Contribution pour le Remboursement de la Dette Sociale).
A third tax social tax, set at 2%, is applicable to property income.
Inheritance tax is one of the major considerations when moving to France and needs careful attention prior to the purchase of a property. Factors to consider include:
- Unlike the UK, the threshold for inheritance tax is very low. Therefore, even a small inheritance is subject to inheritance tax.
- Inheritance tax rates are very high (up to 60%) so it is quite possible for half of an inheritance to be taken in taxes.
- Inheritance law in France limits your choice in terms of who you can leave your estate to.
- Not only your French property, but all of your assets worldwide can be subject to French inheritance law and French inheritance tax.
- French inheritance law is moderately complicated. For example, the level of tax is affected by:
Who is inheriting. Money left to close relations is taxed at a different rate than money left to distant relations. Disabled beneficiaries unable to earn a living receive an additional allowance against the tax.
What is being inherited. Property can be taxed at a different rate than money. Life insurance policies may also be exempt.
How it is being inherited. If you try to avoid inheritance tax by giving away your assets before you die, the beneficiaries can be taxed. This is called Gift Tax and is treated in much the same way as inheritance tax, although it can be reduced based on the age of the donor.
However, the most important point of all is that all of these issues (high taxation, taxation on worldwide assets, restrictions on who can inherit your estate) can be largely avoided by taking the appropriate actions at the appropriate times.
Inheritance tax in France is due if:
- Donor (the deceased) is resident in France. In this case French inheritance taxes are due on all assets, both inside and outside France.
- Donor is not resident in France. Only the assets within France are subject to inheritance tax.
- The heir is resident in France. All inherited assets are subject to French inheritance taxes, even if the donor is not resident in France. However, this is applicable only when the heir has been tax resident in France for six out of the ten years prior to receiving the inheritance.
Between spouses there is a tax free allowance of €76,000. Amounts in excess of this are taxed according to the following table:
|Taxable part (i.e. after allowances)
|Up to €7,600
|€7,601 to €15,000
|€15,001 to €30,000
|€30,001 to €520,000
|€520,001 to €850,000
|€850,001 to €1,700,000
For parents or children, there is a tax free allowance of €46,000. Amounts in excess of this are taxed according to the following table:
|Taxable part (i.e. after allowances)
|Up to €7,600
|€7,601 to €11,400
|€11,401 to €15,000
|€15,001 to €520,000
|€520,001 to €850,000
|€850,001 to €1,700,000
For more distant relations, the tax allowances are smaller and the tax rates are higher. Between brothers and sisters that tax rate is 35% on the first €23,000 (after allowances) and 45% on the remainder. For other relatives (up to the fourth degree) the tax rate is 55% (after allowances). For other cases the rate is 60% (after allowances). Note that in the event of unmarried partners (unless there is a PACS) and in the event of step-children, this rate of 60% is applied.
Certain items (e.g. company securities, sole proprietorships) can have a tax exemption up to 50% of their value. Some items, such as life insurance (up to €152,000) that meet certain criteria, are 100% exempt.
For more information, click on Inheritance Law.
Gift tax is a tax levied on gifts. It was introduced to prevent people from avoiding inheritance tax by giving away their property prior to death. As such, it is not intended for small routine gifts but rather for large gifts (e.g. a house or other substantial property or assets). As the intention is to prevent avoidance of inheritance tax, the tax rates and treatment of gift tax is essentially the same as that for inheritance tax.
However, if the donor is under the age of 65%, gift tax is reduced by 50%. Between the ages of 65 and 75 there is a 30% reduction. A recent law has improved this situation by allowing a 50% reduction regardless of the age of the donor, but this law may expire in 2005.
If your net assets exceed a certain level (currently €720,000), you are liable to pay an annual wealth tax. If you have less than this amount of net assets, you do not need to pay this tax. Note that this is net assets rather than total assets (e.g. if you had a house worth €250,000 with a mortgage of €200,000 then the net assets are only €50,000).
For residents of France the tax is based on worldwide assets (i.e. all your assets and liabilities, both within France and in other countries). For non-residents of France, the tax considers only assets in France. Note that the tax is based on the household rather than an individual, so if a husband and wife individually own assets worth €400,000 each, then they are liable to this tax.
Some assets are exempt (e.g. antiques) and others have substantial allowances (e.g. household goods). One is liable for this tax only if net assets after all exemptions and allowances exceeds the €720,000 level. If one exceeds this level, then only the excess is taxed (at between 0.55% and 1.8%, depending on the amount of the excess). The tax scale is as follows:
|Wealth (after allowances and deductions)
|Up to €720,000
|From €720,001 to €1,160,000
|€1,160,001 to €2,300,000
|€2,300,001 to €3,600,000
|€3,600,001 to €6,900,000
|€6,900,001 to €15,000,000
There is a small tax for collecting and emptying dust bins (for our USA visitors, dust bins are garbage cans). This tax is known as Redevance Ordures Ménagères. It is a relatively small tax (around 100 euros), with the exact level depending on how many people there are in the house, in which part of France the house is located and whether the house is a permanent residence or a secondary residence. You should receive a tax bill in the mail once a year for this tax; this bill will specify the amount due.
Like the UK, in France TV owners must have a TV license. If you buy a television in France, you will be asked by the shop to provide your name and address, which will then be sent off to the tax office. In due course you will receive a letter through the mail asking you to purchase a TV license (Redevance Audio-Visuel).
If you already are paying a TV license and purchase a TV, this will result in you receiving a letter asking you to purchase a TV license (the tax officials automatically send the request whenever someone buys a TV, apparently without checking if they are already paying). The easiest way to respond is to send a letter back saying you already have a TV license; you may want to enclose a photocopy of your existing TV license.
France no longer has an annual car tax. However, when you buy a vehicle you will need to pay a one-off tax, which is done when you register the car in your name. The car registration papers are know at the carte grise.
The above is a general discussion only and does not take into account all individual circumstances. For example, families with disabled children are eligible for special tax allowances (in addition to social payments) and the disabled themselves have additional tax allowances (including inheritance tax allowances).
Every tax system (UK and France included) has a number of tax loopholes. In addition, there can be tax loopholes between countries. In other words, if you have income in one country and are tax resident in another, you may in certain circumstances be able to legally avoid paying tax on this income.
As an example, consider the case where you have investment property (such as, houses you have purchased to let out) and you sell these. If the property is in the UK and you are tax resident in the UK, you would have to pay capital gains tax on the profit. Likewise, if the property is in France and you are tax resident in France, you would have to pay capital gains on the profit. However, if the property is located in the UK and you sell it after you become resident in France, you are not liable UK tax on the capital gain as you are not UK resident and apparently you are not liable to French tax as it is not covered by the double-taxation treaty between the two countries. Consequently, you would be able to take your capital gain completely tax free.
The purpose of this example is to illustrate the existence of tax loopholes between UK and France. Discussion of the exact circumstances under which it is applicable (e.g. minimum time that one must be tax resident in France before returning to the UK) and discussion of how long the loophole is likely to remain open is the subject of specialist tax advice beyond the scope of this page. However, the point to note is that if you are in a position to realise substantial income in one country while living in another, you may wish to obtain specialist advice on not only the normal tax implications of this, but also tax advice on when and how this income should be realised in order to minimise or even completely avoid taxes.