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French taxes on property income

by Tax Faculty Team on 09.07.2012 16:09

What is all the fuss about?

In a Budget announcement made on 4 July, President Hollande explained his government’s plans to plug France’s deficit. One proposal reported widely by the UK press has said this means that UK residents who own property in France may have to pay more tax. This is misleading.

The general social contribution (CSG) was established in France by Finance Act 1991 as part of France’s solution to the problem of financing social security. CSG is payable by individuals living in France and who benefit from the compulsory health insurance. The revenue raised goes to fund the National Family Allowance, the Solidarity Fund pension schemes and insurance. The CSG has a very broad base as it applies both to earnings and to income from wealth. So it applies to property rental income and to profits on property sales.

Until now, CSG (known as the ‘social charge’) was only payable by French residents. This has meant that non-residents have not paid as much tax in France as residents did on similar French source rental income nor on their gains on disposals of French property. The plan now is that France will add a CSG charge to the French income tax that non-French residents pay on their rental income and also to the French capital gains tax they pay on sale.

Social charges in France actually raise more revenue for France than income tax, so the rates tend to be quite high.

It seems to us that the main effect of these proposals is to change the balance of tax paid between France and the UK rather than adding to the total. The social charges are covered by the double tax treaty, and are therefore considered to be a tax on this basis. A UK resident, they may have a UK tax liability as usual and as long as the French liability is lower than this, double tax relief applies and overall, they will not have paid any additional tax.

For UK residents who don’t let their holiday homes in France, there is no income tax to pay. We also note that if President Hollande’s other proposals are passed, no tax will be payable if the property is sold after 22 years ownership, and neither should social charges. The French taxable gain will also be reduced from the 3rd complete year of ownership onwards.

CSG on income will apply retrospectively from 1 January 2012, although the tax on sale will only apply to future sales.

Last year, Nicolas Sarkozy tried to tax non-residents on their French properties, but his plans were abandoned after a massive outcry both by French expatriates and other non- French residents. We shall see what happens this time.