Tax Liability on Rental Income in France: Residents & Non-Residents

 

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Tax Liability on Rental Income in France: Residents & Non-Residents

If you own a second home or have real estate investments in France and you rent your property out, it’s essential to understand your responsibilities regarding tax on your rental income. Here’s what you need to know.

Will you pay tax on your rental income in France?

Yes. Rental income arising on a French property is always taxable in France, regardless of where the money is paid to you or where you live. However, there are some differences, depending on whether you are resident or non-resident, and the kind of business regime your rental property falls under. As with all income in France, your rental income will be subject to both French income tax and social charges, so it’s important to take both of these figures into account.

Tax on rental income for residents in France

Tax rates and allowances on rental property in France depend upon the type of business regime your rental property falls under.

Business regimes for renting property in France

Taxable rental income is calculated under two regimes in France: revenus fonciers, applicable to income from land and unfurnished lettings; and Bénéfices Industriels et Commerciaux (BIC) applicable to income from furnished lettings, which is treated for calculation purposes as commercial income (although it is specifically investment income unless you are in a position to adopt a professional approach).

Where the gross rental income (i.e. the total rental income before deductions) from furnished lettings is less than €72,600 for services and self-catered rentals (or less than €176,200 for self-catered rentals that have valid tourist certificates, and para-hotel/B&B activities), the taxable income may be calculated under the Micro-BIC, a simplified deduction scheme that simply taxes 50% of the gross income (i.e. 50% of the gross rental income – so the total income with no deductions at all – is automatically deducted in place of actual expenses). For gîtes, chambres d’hôte and meublé de tourisme, the threshold rises to €82,200, and the amount given in lieu of actual deductions is 71%, so only 29% is taxable.

Under this regime, no expenses need be demonstrated, no accounts are required and no separate tax forms for the business need to be prepared. The main drawback of this regime is that it always shows a fixed taxable profit i.e. it can never show a lower net profit or a loss.

A similar simplified deduction scheme called the Micro Foncier can be applied for income from unfurnished property or land, provided the gross rental income does not exceed €15,000 per annum. In this case, the percentage deduction is 30%.

If the turnover exceeds the above thresholds, you will automatically fall within the income and expenditure method of calculation, the Régime Réel Simplifie (RRS). Under this method, actual expenditure related to the letting of the property is tax-deductible e.g. management expenses; insurance; property tax; mortgage interest; depreciation; repairs; maintenance and improvement expenditure (generally where the property has been modernised or made more comfortable, but where the structure of the property has not been changed). Improvement costs related to rebuilding or expanding your property are tax deductible for capital gains tax purposes only.

The default position where you fall within the above thresholds is the Micro regime. However, should you make a loss or your expenses exceed the fixed ‘Micro’ deductions, you may opt into the RRS. Such an option is currently valid for a minimum period of two years for furnished lettings, and a minimum period of three years for unfurnished lettings, and the cost of this regime can often outweigh the tax saving. In some circumstances, the option may be more beneficial, such as where there is a high level of expenses (e.g. a large amount of mortgage interest), if this gives rise to a loss that could be carried forward and set against future profits. There are also strict restrictions on the timing of such an option.

If your gross rental income exceeds €23,000 per annum (and other requirements are met), you may register as a professional furnished landlord (loueur en meublé professionnel – LMP), as this can be advantageous with respect to French capital gains and wealth tax.

If the property is held in an SCI (a private French property-holding company) or a non-French company, the Micro regimes cannot be applied to rental income. In either case, and with the Réel regime for individuals, any tax savings from operating the RRS may be lost in additional accountancy bills. If an SCI lets a furnished property, the income becomes subject to corporation tax, not income tax, as does any capital gain on disposal. There are additional penalty taxes if the property is owned via a company in a blacklisted country.

Social charges/contributions on rental income in France

French social charges on rental income are calculated based on three different rates with a maximum total of 17.2%:

  • CSG (Contribution sociale généralisée or Generalized social contribution) –9.2%/0%
  • CRDS (Contribution pour le remboursement de la dette sociale or Contribution to the repayment of social debt) – 0.5%/0%
  • Prélèvement de Solidarité (Solidarity tax) – 7.5%

Will you pay tax on your UK, US, or other overseas rental income in France?

What about if you become resident in France, but you still own and rent out your UK, US, or other overseas property? In this case, you will be liable to declare your rental income in France. However, most countries that have a double-tax treaty in place with France, including the UK and the United States, stipulate that rental income is taxable in the country where the property is located.

You will therefore be required to file a tax return both in the country where your property is located and in France. However, you will the receive a tax credit to offset against your French taxes. In the instance that the French tax rate is higher than the other country’s tax rate, you will be liable to pay the difference.

Additional tax liabilities for foreign property owners in France

There are also a few additional tax liabilities that you should be aware of. If you opt to sell your overseas property, you will be liable to pay capital gains tax in France, as well as in the UK, US, or country in which you own the property. As most countries have a double-tax treaty in place with France, you won’t be required to pay CGT twice; however, you will typically pay the higher of the two taxes. Read our guide to Capital Gains Tax in France.

For those with global property assets totalling over €1.3 million, you will also become liable for French Wealth Tax or Impôt sur la Fortune Immobilière (IFI). Read our guide to French Wealth Tax.

Finally, it’s important to consider the inheritance tax laws of both countries—this can be a complex area of international law, so it’s highly recommended to seek advice on your situation before moving to France. Read our guide to Inheritance Tax in France.

Taxes on French rental income for non-residents

If you are not resident in France but rent out your French property, your rental income will be taxed at source in France. You will be subject to a flat-rate of income tax and social charges on all of your rental income. These rates apply to the net rental income, so you may deduct eligible costs or opt for the standard allowance, before your tax is calculated.

Non-resident renters have two options—the simplest is to pay the flat rate of tax on your rental earnings. From 2019, the tax rate applying to rental income for non-residents is 20% up to a threshold of €26,070. Any rental income over this amount will be taxed at 30%.

The second option is to apply the French scale rates of income tax to your worldwide income in order to establish the effective tax rate on the French letting income. In that case, the tax liability is calculated on your global income as if youwere a French tax residents, but then the proportion of the tax liability related to the income that is not subject to French taxation is discounted.

Note that you will likely still need to declare your French rental income on your tax declaration in your country of residence. In most instances, you will receive a tax credit equal to the taxes already paid in France. In the event that the tax liabilities in your country of residence are higher than those in France, you may still be liable to pay the difference.

Social charges on rental income for non-residents

Your rental income in France will also be subject to social charges. French social charges on rental income are the same for residents and non-residents — 17.2% as detailed above.

However, for non-residents affiliated with an EU, EEA, or UK social security system, there is an exemption from the CSG/CRDS taxes.

Essentially, this means that EU or UK residents only pay the 7.5% solidarity tax on any investment income or capital gains. This also applies to UK residents post-Brexit, but some conditions do apply – see our guide to Social Charges on Investments and Capital Gains Post-Brexit.

Taxes on French rental income for UK Residents

The following specifically relates to owners of French rental property resident in the UK.

If you remain UK resident, the French rental income will also be liable to UK income tax, wherever the money is deposited or paid to you, or even if the money is never brought into the UK. Any French tax paid is deductible against the UK tax liability, in accordance with the UK/France Double Tax Treaty. Where the French tax is higher, no further tax will be due in the UK, and no refund will be made for the difference. However, if the UK tax liability on the income exceeds the French tax paid, the difference between the two liabilities will be due in the UK.

Each country will apply its own rules in calculating the taxable income, and each country has a different tax year (the UK tax year runs from 6th April to the following 5th April, and the French tax year is a calendar year).

In the UK, the taxable income is calculated by deducting actual expenses wholly and exclusively incurred for the purposes of the letting and include: agent fees and commissions, repairs, insurance etc., interest on any loan used to acquire the property (if you extend a UK mortgage over your main home, only the element related to the purchase of the French property will be permitted). A ‘wear and tear’ allowance is available if the property is furnished, which is 10% of the gross income subject to certain deductions (e.g. utility bills paid by you that the tenant would normally pay for themselves). From April 2016, the wear and tear allowance will be removed, and only expenses incurred will be deductibles.

Therefore, if you are UK resident, it is essential to keep full records, because whilst there may be simplified deduction schemes in France, there are none in the UK. You need to make a note of the dates as well, because you will need to convert the Euro amounts into Sterling for UK tax purposes at the individual dates in question.

Paying Your Taxes in France

Whether you are moving to France, own French property, or have business interests, assets, or investments in France—FrenchEntrée is here to help with all your tax questions. Our Essential Reading articles will talk you through all the basics, from income tax and social charges to wealth tax and property taxes. However, international tax liabilities can be complicated, so if in doubt, we always advise discussing your personal situation with one of our recommended financial or tax advisors.

Disclaimer: This guide is provided for general information purposes only and is not intended to be a substitute for professional advice regarding any aspect of your tax planning or tax liabilities in France. FrenchEntrée cannot be held responsible for the consequences of decisions or actions you may choose to take in connection with French tax declarations or tax liabilities.

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