4. Taxation

1. 4.1 Non-Residents
2. 4.2 Summary of Tax Regimes
3. 4.3 Furnished Accommodation
4. 4.4 Unfurnished Accommodation
5. 4.5 Lodgings

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4.1. Non-Residents

You are liable to French income tax on rental earnings, whether or not you are resident in France.

If you are not resident then you are likely to get relief from the prospect of being taxed twice on the same income, depending on the existence and terms of any ‘double taxation treaty’ between France and your home country.

Accordingly, even though you may be non-resident you will need to submit a tax return to the French authorities of your rental income in France. In addition, you will need to declare the income to the tax authority in your own home country. We have not statistics on how many actually do so!

UK residents benefit from a double taxation treaty, but need to declare the rental income to both the French and UK tax authorities.

The social levies payable by residents on their rental income (see later in this section) do not apply to non-residents.

Tax paid in your home country will be offset against liability to French income tax and, as French income taxes are quite generous on rental income, it is more often the case that no tax is payable in France.

If you can, include your income tax notice from your home country with your French tax return.

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4.2. Summary of Tax Regimes

There are a number of different income tax regimes for rental profits, with the major distinction depending on whether or not you let furnished accommodation or unfurnished property.

If you let both, then each will taxed on a separate basis, using the applicable tax regime for each type of letting.

A second distinction will depend on your turnover, with smaller landlords given some choice as to the basis on which they can be taxed.

In the following table we summarise the basic tax regimes. We do not consider the system of company taxation of property profits. This is unlikely to be advantageous unless you have substantial rental or other earnings.

However, it is possible to establish a fiscally transparent French property company, called an SCI, and adopt the system of personal taxation outlined below, for use with unfurnished accommodation.

The basic differences in the various income tax regimes are as follows:


Table: Tax Regimes

	Furnished Accommodation		Unfurnished Accommodation
Tax Regime	Micro BIC	Regime Réel	Micro Foncier	Regime Réel
Max Turnover	€76,300	Unlimited	€15,000	Unlimited
Tax Allowance	71%	Actual Costs	30%	Actual Costs

In collaboration with a good accountant/tax lawyer, you will need to assess your circumstances and take a view as to what best fits in your case. The following sections describe each tax regime in further detail.

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4.3. Furnished Accommodation

1. 1. Income Tax
2. 2. Social Welfare Levy
3. 3. Local Rates
4. 4. VAT

4.3.1. Income Tax

There are two different income tax regimes for the taxation of profits from furnished accommodation, and most landlords can choose the regime under which they wish to be taxed.

The two tax regimes are:

1. i. Micro-Entreprise
2. ii. Regime Réel

The following guidance notes refer primarily to furnished accommodation let on an annual basis or seasonal basis, although the basic rules remain the same for furnished accommodation offering a range of services, e.g. chambres d'hôtes and holiday complexes in rural areas, called résidences de tourisme .

i. Micro-entreprise (BIC)

Most small landlords of furnished accommodation choose to be taxed as a micro-entreprise under a system of taxation called Bénéfices Industriels et Commerciaux (BIC).

You will be eligible for micro-entreprise tax status if your gross revenues from furnished lettings do not exceed €76,300 per annum.

In the case of landlords of furnished accommodation the allowance is a not inconsiderable 71% against earnings.

This means you are taxed on 29% of gross rental earnings.

The actual rate of taxation will be that applicable under the normal rules for personal income tax, so it will depend on your family circumstances.

In short, income from furnished lettings is taxed as personal income tax, but under the rules of Micro-Entreprise BIC.

If your earnings are small, the level of income tax is likely to be minimal, as there is a strongly progressive system of personal income tax in France.

ii. Regime Réel

If your actual costs are higher than 71% of gross revenues, then you would be better off electing to be taxed under a system called regime réel.

These costs include general management costs, the costs of property insurance, local property taxes, the costs of a managing agent, guardian, caretaker, or gardener and the costs of insurance taken out against the risk of non-payment of rent by the tenant.

Also deductible are the interest costs associated with the purchase, repair or improvement of a rented property or a property purchased with a view to it being let. It is irrelevant whether these interest costs arise from a secured or unsecured loan.

You can also deduct the fees associated with taking out a loan, as well as life insurance premiums payable to guarantee the loan.

Whilst the costs of improvement, repair and maintenance of the property are deductible, works to increase the size of an existing property, or add additional units, are not ordinarily deductible. This is often a difficult area, and a discussion with your local tax office is advisable before you start any new construction works.

Similarly, works such as a new swimming pool would not be deductible.

However, local offices are often reluctant to accept invoices for materials only, so make sure the invoice has on it the address of the property, and not that of your principal home. You may also want to take 'before' and 'after' photos as proof, or discuss the project with the local office before you start.

In the event that you incur a loss in the year (due, for instance, to major works) then you are entitled to carry forward losses.

Losses can be carried forward on your furnished rental earnings for up to six years. If you are registered 'professional landlord', then losses can be set against the totality of your earnings, whether from furnished lettings or other activity.

Accordingly, if you elect for the regime réel, or you are obliged to use it, there is a degree of bookeeping involved, which you might be wise to do in any event!

Nevertheless, if you elect to be taxed in this way then it is irrevocable for a period of three years, and renewed automatically for a further three years if not revoked.

Whilst you will not necessarily be required to produce the invoices and receipts for the purposes of the tax declaration, you can later be asked to do so by the tax authority.

4.3.2. Social Welfare Levy

In addition to income tax, the main other tax for which a landlord is liable is a social welfare levy called the prélèvements sociaux, (and otherwise also known as CSG/CRDS), at the rate of circa 11% on net rental income. This charge is deductible against income tax at the rate of 5.8%.

Non-residents are not liable for the tax.

4.3.3. Local Rates

There are three local property rates for which a landlord may be liable:

1. i. Land Tax - the taxe foncière.
2. ii. Local Business Rates - the taxe professionnelle.
3. iii. Residence Tax - the taxe d'habitation.

i. Land Tax - All property owners pay the land tax, (the taxe foncière), as this is a tax payable on the ownership of property.

Owners of chambres d’hôtes and classified gîtes and meublés de tourisme in rural development areas (Zones de Revitalisation Rurale (ZRR) are able to claim exemption from the tax. This concession is subject to a general decision of the local council to exempt such properties. However, the rules have recently been changed (March 08) so that exemption is not available for that part of the property that has shared use between the owner and guests. Only the rooms/space used exclusively by the guests would be eligible for the concession.

ii. Business Rates - As a general rule, if you let out furnished accommodation on a habitual basis, then you are liable for the local business rates (the taxe professionnelle) on the rented property. You do not need to be registered with the authorities as a 'professional landlord' to be liable for the tax.

This rule applies in all cases where the property is a separate dwelling, but it may also apply if the accommodation comprises rooms in your own house, provided it occurs, as always, on an habitual basis.

There are three main exceptions to liability to the business rates.

First, if you let out your main home, or the rooms in it, on a seasonal basis then, as a normal rule, you would not be liable for the for the business rates. It will depend on the level of revenue you earn as a proportion of your total revenues; how regularly it occurred; and whether the tax authority considered it to be a secondary activity to your main employment or business. If you do find the tax authority decide to impose the tax, you should take it up with them and try and contest it. If it is regarded as 'habitual', the local mairie also has some discretion to waive the payment of the tax for such lettings, but you would need to make enquiries to them.

Second, owners of chambres d’hôtes and classified gîtes and meublés de tourisme in rural development areas (Zones de Revitalisation Rurale (ZRR)) are able to claim exemption from the local property taxes on the same terms as stated for the Land Tax in i. above.

Third, you escape liability if you let out lodgings on a low rental, within the terms set out in section 4.5 below.

iii. Residence Tax - You do not have responsibility for the taxe d'habitation, provided the tenant occupies the property as their principal home. The tenant is then responsible for the payment of this tax.

However, if you let out rooms in your own house then you also have a liability for the taxe d'habitation, as the property is your home. This responsibility is shared with the tenant(s), provided they occupy their room on an exclusive basis, as their principal home. If they do not occupy the property on this basis, then you will be entirely responsible for the taxe d'habitation.

Owners of chambres d’hôtes and classified gîtes and meublés de tourisme in rural development areas (Zones de Revitalisation Rurale (ZRR)) are able to claim exemption from the tax, on the same terms as stated for the Land Tax in i. above.

If the landlord does not do so, then they can be made responsible for the tax in the year the tenant vacates, although this is a rule that is not always enforced.

4.3.4. VAT

Generally, there is no VAT applicable to furnished lettings, although VAT is applicable for registered landlords, where at least three of the following services are also provided to the tenant - breakfast, daily cleaning, reception service, linen service.

There are particular rules on VAT and other taxes which apply to hotels, chambres d'hôtes and classified tourist properties, called les résidences de tourisme classées, which we shall cover in due course.

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4.4. Unfurnished Accommodation

Whilst rental income from furnished property is taxed under the tax regime of Bénéfices Industriels Commerciaux (BIC) outlined above, rental income from unfurnished property is taxed under a system of revenus fonciers (property income).

This tax regime applies to both residential and certain non-residential property, but the following guidance notes are restricted to residential property.

Three income tax regimes apply for revenus fonciers:

1. i. Micro-Foncier
2. ii. Regime Réel
3. iii. Special Tax Regimes

4.4.1. Micro-Foncier

Where your total rental income from unfurnished property does not exceed €15,000 a year then you are entitled (but not obliged) to be taxed under the system of micro-foncier .

This figure is doubled if a couple run the business.

This means that you do not need to calculate and deduct actual costs against gross income to arrive at a figure for taxable profits, as the automatic allowance will be used.

You will be taxed on 70% of your gross rental income.

Accordingly, if your actual eligible costs are less than 30% of gross income then you would benefit from being taxed under this system.

If your costs are higher than 30% then you would be better off electing to be taxed under the regime réel, where you are taxed on the basis of actual net income.

You cannot carry forward losses incurred in the year under the regime of micro-foncier in the same way as is possible with the regime réel.

So, if you undertake major works to a property to get it ready for letting, then you are likely to be better off electing for the regime réel.

The rate of taxation under micro-foncier will depend on your family circumstances. A flat rate level of taxation will not apply as occurs with company tax – you will be taxed on a progressive basis as if you were earning a salary.

If you let a unfurnished property using one of the special tax regimes outlined below in 4.4.3. then you cannot benefit from use of the system of micro-foncier.

4.4.2. Regime Réel

If your eligible costs are greater than 30% of your gross rental income then you would be better off choosing to be taxed under the regime réel.

Similarly, you are obliged to use the regime réel if your turnover is in excess of €15,000 per year.

These costs include general management costs, the costs of property insurance, local property taxes, the costs of a managing agent, guardian, caretaker, or gardener and the costs of insurance taken out against the risk of non-payment of rent by the tenant.

Also deductible are the interest costs associated with the purchase, repair or improvement of a rented property or a property purchased with a view to it being let. It is irrelevant whether these interest costs arise from a secured or unsecured loan.

You can also deduct the fees associated with taking out a loan, as well as life insurance premiums payable to guarantee the loan.

The costs of improvement, repair and maintenance of the property are fully deductible but, as with furnished lettings, works to increase the size of an existing letting, or add additional letting units, are not ordinarily deductible. This is often a difficult area and a discussion with your local tax office is advisable before you start any new construction works.

Similarly, works such as a new swimming pool would not be deductible.

However, local offices are often reluctant to accept invoices for materials only, so make sure the invoice has on it the address of the property, and not that of your principal home. You may also want to take before and after photos as proof, or discuss the project with the local office before you start.

In the event that you incur a loss in the year (due, for instance, to major renovation works) then you are entitled to carry forward losses.

Provided you continue to let property for at least three years, losses up to €10,700 a year can be carried forward on your total earnings for up to six years, but any losses in excess of this amount can only be charged your revenus fonciers for a period not exceeding ten years.

Accordingly, losses on one property can be offset against the rental profits on another rented property.

Losses charged against global earnings are only permitted where you continue to let the property for three years and interest costs are formally excluded from being able to be charged against global earnings. These can only be charged to your revenues fonciers.

In practice, provided interest costs do not exceed gross rental income, the tax authority may well allow them to be deductible from global earnings. Local offices seem to interprete the rule on this point differently.

So, if you elect for the regime réel (or you obliged to use it), it would be prudent to engage a good accountant to assist with the bookeeping and tax declaration.

If you elect to be taxed in this way then it is irrevocable for a period of three years. At the end of this period it is renewable on an annual basis.

Whilst you will not be required to produce the invoices and receipts for the purposes of the tax declaration, you can later be asked to do so for them by the tax authority.

4.4.3. Special Tax Regimes

There are a number of special tax regimes that are available to landlords who are prepared to let a property on a concessionary basis for a minimum period of nine years.

There are also investment funds that offer the possibility of investing in this type of letting.

They are only likely to be of interest to those with a high marginal rate of taxation on their income.

Chief amongst the schemes are those of ‘Robien’, ‘Borloo’ and ‘Besson’, named after the politicians who introduced them.

Needless to say, you are strongly advised to take professional advice before you choose to invest in one of these schemes.

4.4.4. Other Taxes

i. Social Welfare Levy

In addition to income tax, the main other tax for which a landlord is liable is a social welfare levy called the prélèvements sociaux, (and otherwise known as CSG/CRDS), at the rate of circa 11% on net rental income. This charge is deductible against income tax at the rate of 5.8%.

ii. Local Rates

The landlord is responsible for the local property rates called the taxe foncière, but the tenant pays the local residence tax called taxe d’habitation if occupied by them on 1st Jan in the year. The landlord is not responsible for the tax, on any terms.

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4.5. Lodgings

Those who let out cheap digs in their own home are exempt from income tax and business rates.

The accommodation must be the principal home of the tenant, and the rental must not exceed a rate of 163m2 in the Ile-de-France, or €118m2 in the provinces (2007). These maximum rents are adjusted each year

Thus, for a room measuring 20m2 in the provinces, the rental cannot exceed €2260 per annum, or €196 per month.

These maximum rents exclude other charges that may be payable e.g. meals, laundry.

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Next: Finding a Tenant