Types of French Tax

The types of French tax which you are likely to encounter will depend upon whether you are purchasing a property in France as a second or vacation home, as a strategic investment, or whether you are planning to reside full time or retire to France.
The most common types of French tax that you are likely to encounter are set out below:

Taxe Foncière (local land tax)

This tax is payable on all French "freehold" property whether or not the owner is in occupation. The demand for this tax is usually received in the autumn when the deadline for the payment will be specified. When a buyer purchases the "freehold" of a property it is standard practice on completion to reimburse the vendor pro rata for any Taxe Fonciegrave;re paid by him but not notionally used up. The apportionment is made by the notaire at completion time provided, however, that such apportionment is stipulated in the promesse de vente or the compromis (ie the preliminary contract). The tax fonciegrave;re consists of two parts, namely, a levy on the land and one on the buildings standing on the land, if any. Consequently any improvement to buildings must be notified to the authorities as it will have an incidence on future tax bills.

Taxe dHabitation (habitation tax)

This is a local tax which can be likened to a form of French Council tax. The taxe dhabitation is payable by the owner of any built land provided the building is fit for habitation, whether or not such building is physically occupied. The taxe dâhabitation is payable once a year in the autumn. In a sale of built land, the taxe dâhabitation is payable in full by the person who was in ownership of that land in the month of January of the year in which the property was sold. The tax is based on the notional rental value of the property which is reviewed annually. The findings of the review can be contested by making timely appropriate representations to the relevant authority. It is important to note that if the property is let out to a tenant, the payment of this tax falls to him, and not to the owner of the property.

Taxe sur la Plus-Value (Capital gains tax)

Capital gains tax is charged in France on gains which accrue in respect of "one off" at "arm's length" transactions carried out otherwise than in the course of business. Hence, for example, benefits made by purchasing and re-selling land in the course of business are chargeable to income tax or corporation tax, depending upon whether the vendor is a private individual or a company not to capital gains tax. Furthermore, capital gains tax is chargeable neither on inter vivos gifts (gifts made in the lifetime of the donor) or dispositions made by will, both types of gifts attracting inheritance tax only. In truth there is an element of capital gain tax concealed in the inheritance tax, as the value to be charged to inheritance tax reflects the value of the gift at the time of its grant and not at the time when it was first acquired by the donor or testator.

When it comes to taxing capital gain on the sale of residential property, French revenue law, exempts such property from capital gain tax inasmuch as such sale relates to the principal private residence of the disposer and that it is effectively occupied by him at the time. This exemption applies to British nationals, who are residents in France for income tax purposes, upon selling their principal residence there. Owners, selling a private residence that is not their principal home, are liable to pay capital gain tax on such sale, regardless of their nationality or residency status (save for some exceptions not covered here), subject to taper relief which effectively takes the sale out of charge to capital gain tax altogether, if the property has been retained in their ownership for 15 years or more.

The rate of capital gain tax before taper relief is 16% where the gain accrues (inter alia) to:

• A resident selling a "secondary" home,
• A non-resident individual, and
• A resident "land" company owned by non-resident individuals.
  
  This rate increases to 33% where the property is owned by a resident or non-resident company paying corporation tax in its country of incorporation. Such company incidentally, is not eligible for taper relief in France.
  As with most areas of law the issue of taxation is an area in which advice tailored to one's individual circumstances is preferable.

TVA = Taxe sur la Valeur Ajoutée (French VAT)

French VAT is payable in different circumstances and at different rates to VAT in England. One important difference is that in England VAT is not payable on new build property while in France it is. French VAT is payable on new build properties and therefore has been the driving force behind the popularity of leaseback schemes designed to enable the French VAT to be recovered by the Purchaser under defined circumstances and situations. The subject of French leasebacks is covered in more detail elsewhere on this website.

• French VAT is generally, currently, payable at 19.6 %. It can be payable at a reduced rate in certain circumstances such as when rent is being received from property rental under a leaseback scheme. French VAT is payable upon the resale of a new property by the Purchaser of new property if the property is resold within 5 years of the original purchase VAT can also be demanded by the French fiscal authorities on the resale of a renovated property within 5 years of the completion of the renovations. Reduced rates of VAT, 5.5%, can apply to certain aspects of renovation projects in certain circumstances. The circumstances are determined by the VAT tax officials and are open to appeal. This law is applicable to January 31, 2010. VAT is a complicated and an evolving tax and professional advice is always recommended to take into account the individual circumstances of the property owner. French Inheritance tax (droits de succession) As mentioned above under the heading of capital gain tax, French inheritance tax is charged on any disposal made inter vivos by way of gift or on testamentary disposition. In the event of a person dying intestate his estate will also be liable inheritance tax.

The principal characteristic which separates out French from British inheritance tax, is that French inheritance tax is donee based whereas British inheritance tax is donor based. What this means is that the French Inland Revenue taxes a gift or a disposition in the hands of the beneficiary not in those of the donor or testator (or intestate).
This is because, unlike in Britain, different levels of kinship with the donor or testator attract different levels of inheritance tax. In Britain, there are a number of exemptions to inheritance tax, such as (inter alia) transfers inter vivos and by will between spouses, the 7 years potentially exempt transfer (PET), and a fairly simple rate structure for the tax, namely, a nil rated band on the donor's or testator's disposal or estate up to a threshold of £300,000, and, thereafter, two rates , a 20% lifetime rate and a 40% death rate, making it relatively easy to look to the estate (or disposal) of the donor or testator for taxation.

The French system, by reason of a more complicated rate structure, lends itself better to individualized taxation in the hands of the beneficiaries. Furthermore, by taxing inherited wealth in the hands of the recipients rather than looking at the estate as a whole, and given that inheritance tax is graduated , the French system achieves a taxation of the parts which is less heavy than if the estate where taxed as one entity. This is a deliberate policy which reflects French society's attachment to the transmission of family based wealth, and it has survived the vicissitudes associated with various socialist governments over the last 25 years.

In fact, the new conservative government which was returned to power in June 2007 following the election of Nicholas Sarkosy to the presidency, has just enacted on 22nd August 2007 a new statute which goes a considerable way towards taking certain categories of beneficiaries out of the scope of inheritance tax altogether, or substantially reducing their liability to it. Following this new law, testamentary dispositions (but not inter vivos gifts) between spouses are made exempt from inheritance tax as well as testamentary dispositions between civil partners bound by a "Pacte Civil de Solidarité" (PACS). Inter vivos gifts or testamentary dispositions to children are nil rated up to 150,000 Euros for each child. Furthermore, each grandparent may make a tax free 30,000 Euros inter vivos gift to each of its grandchildren provided the grandparent is over 65 and the grandchild 18 or more. This new rules are imbedded into earlier provisions relating to inheritance tax of which a few are now listed:

• French inheritance tax operates a death rate and a life time rate.
• The death rate as indicated earlier varies according to the degree of kinship of the beneficiary with the deceased.
• If the beneficiary is a descendant of the deceased the rate is progressive and rise from 5% to a maximum of 40% on amount in excess of 1,700 000 Euros (the first 150,000 Euros are charged at nil rate, see supra)
• If the beneficiary is a not related by blood to the deceased or its surviving spouse, the death rate is a flat rate of 60%
• All these rates are halved if property is transferred by way of inter vivos gift provided the donor is less than 70 years old. This concession drops to 30% if the donor is 70 years old but less than 80.

The nil rate band applicable on testamentary dispositions (or intestate succession) to descendants or a partner in an official partnership (PACS), applies also where the descendant or partner receives the disposition by way of inter vivos gift. This relief carries through to subsequent gifts to the same donee or donees, providing there is an intervening period of six years between gifts.  

French Income tax

Personal liability for French income tax will obviously vary depending upon the difference circumstances of the taxpayer. One of the guiding principles is that families and children are encouraged with reasonably generous tax breaks. For example someone who is married and works with a spouse who looks after their two children will generally pay half the tax of a single person with no children.

The rate of tax varies from 0 % to 40%. Using 2006 figures a single person earning between 24,872 to 66,679 euros would pay a top rate of 30% tax on that amount, with a maximum cap of 14,764 euros payable on that band of earings, whilst a married couple would have to earn between 69,342 to 133,358 euros to pay a top rate of 30 % with a maximum cap of 25,131 euros payable on that band of earnings.

Pension income for those over retirement age is taxed reasonably in France but beware of other taxes and charges levied upon this and other income, such as the "cotisations", which are briefly mentioned below.

Obviously these rates of tax may well be subject to change soon.

Wealth Tax (Impot de Solidarité sur la fortune “ ISF

Much is talked about wealth tax but there are two key points to remember. Firstly that if you are not resident in France then wealth tax is only chargeable upon the net asset value of your French property, secondly that wealth tax is only charged on the amount by which the value of that property exceeds 760,000 euros.
Please note that the information provided here is based on 2006 figures, and it is likely that reforms to this tax will increase the threshold at which it becomes payable.
If you are French resident then strictly speaking wealth tax should be declared and paid on all assets and it is paid on that amount over 760,000 euros (2006 figures).

Other taxes and charges :

In addition to French income tax be aware that you will need to register for and pay other social taxes and charges (cotisations).
The two main types of cotisations which may concern someone settling in France from overseas are Health Cover and Social Security payments.
For someone settling in France with the intoention of perhaps becoming resident these cotisations taken together can amount to a significant proportion of income. Whether or not these cotisations are payable will depend upon individual circumstances and whether or not one is considered by the French fiscal authorities to be resident in France.