French Tax Guide » French Property Investment Income and France as a Tax Haven
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 have heard that France is a high tax
country for UK property investors to move to. Is this correct?
A.
No this is totally wrong. It is a complete tax haven for Capital Gains
Tax and a partial tax haven for income tax. The significant tax breaks in France
for UK property investors are simple to use but not well understood. Talk me
through your proposals and I will explain how you can benefit.
Q. I want to stay in the UK for the next few years and build up a portfolio
of rented properties in France. How will I be taxed on the income?
A. The income will initially 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. In order to deduct the mortgage interest against the rents do I have to
borrow from a French bank or the French branch of a UK bank?
A. No you can borrow from your normal UK lenders. You can even set up a mortgage
with a private person.
Q. Does it make any difference if I rent furnished or unfurnished property?
A. Yes. In France unfurnished property is treated as non-commercial income
whilst rented property is treated as commercial. They are taxed in different
ways. In England there is effectively no difference.
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 move to 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 tax and financial planning area with plenty
of benefits, 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 tax to pay either in the UK or France.
Q. Why is that? I thought if you ceased to be UK resident you would become
French resident and pay tax in France?
A. You will be non-resident for UK purposes and not liable to UK CGT, assuming
you do not return to the UK within 5 years. Although France taxes its residents
to French CGT on a worldwide basis this is subject to anything to the contrary
in a double tax agreement. The UK France double tax agreement is interpreted
by the French Inland Revenue to mean that you pay no tax on gains made on English
property. This surprisingly makes France a tax haven for UK property investors.
Q. Once I am in France how will I be taxed on my rental income from my UK
properties?
A. Any properties in your personal name will be taxed in the UK under the
non-resident landlord scheme at 22%. The income is not taxed further in France
because of the way France interprets the double tax treaty. The income should
however be included in your French tax return and may push you into a higher
tax bracket in France for the taxation of your French income. Again surprisingly
moving to France is likely to save a higher rate taxpayer 18% on his UK rental
income.
Q. How is the income computed for French tax purposes? Can I just use the
UK net figures or do I need to recompute 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 French Wealth Tax and Inheritance Tax. The tax treaty
with France is being renegotiated and the current tax friendly approach in
France may well change.
Q. I want to start dealing in property in France now whilst I am still resident
in the UK. This will start with renovating 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. They pay effective tax at similar rates.
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%. Remember the first £10,000
profits in a UK company are tax-free.
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. The double tax treaty overrules domestic
French law though local notaries may not appreciate this important point.
The
notary deducts from the money you receive the French CGT which is 50% of
the gain and will refuse to pay the sale proceeds to you until you have appointed
a French Tax Agent to agree your tax liability with the French Inland Revenue.
Your works to the property may (at the notaries discretion) be deducted from
the profit reducing the amount withheld. This is generally an unattractive
option as most of the tax agents have very close connections with the French
Revenue and may require you to deal with
fairly exhaustive enquiries. Please note that if you are not dealing in property
then 33.3 % is withheld by the notary on the same basis as above. In our
view this is illegal under the UK France Double Tax Treaty as the UK does
not apply
any withholding tax to French residents buying UK land. It is also likely
to be illegal under the European Convention on Human Rights. If anyone is
experiencing
this problem we have the expertise to assist in resolving it.
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.
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