4. Taxation of Property Rental Income in France

1. 4.1. Non-Residents
   4.2. Summary of Tax Regimes
   4.3. Furnished Lettings
   4.4. Unfurnished Lettings
   4.5. Lodgings

4.3. Taxation of Rental Income from Furnished Lettings in France

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 micro-entreprise and regime réel.

i. Micro-Entreprise

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-BIC tax status if your gross revenues from furnished lettings do not exceed a fixed amount each year. You do not need to be a registered business to be taxed in this way.

Under this system, your tax liability is calculated after deduction of a fixed percentage allowance against annual turnover.

The level of the fixed allowance and turnover limit will depend on the type of furnished accommodation you provide.

For all other landlords of furnished accommodation the allowance is 50% against earnings and the maximum turnover limit is €32,000 per annum.

This means you are taxed on 50% or 29% of gross rental income, depending on the type of accommodation you let.

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-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.

The use of Micro-BIC is not available to unrelated persons who jointly own a furnished rental property in France en indivision or en tontine. You will need to adopt the regime réel, details of which are set out below. Thus, if you own the property jointly, you can only use Micro-BIC if you are married, or in a French civil partnership (PACS).

ii. Regime Réel

If your actual costs are higher than 50%/71% of gross revenues, then you would be better off electing to be taxed under a system called regime réel.

You do not need to be formally registered as a business to use this tax regime, but if you are, it cannot be used by an auto-entrepreneur or mainstream micro-entreprise.

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 the year they arise and for the nine subsequent years, but only against your furnished rental income.

If you are a registered professional landlord, these losses can also be set against your total earnings.

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 Charges

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 12.1% on net rental income. This charge is deductible against income tax at the rate of 5.8%.

These charges are payable even though you may not be a registered business in France.

Non-residents are not liable for the tax.

• As a registered micro-entreprise you will pay social security contributions that total around 45% on 50% or 29% of gross rental income, depending on the type of accommmodation, as discussed above.
• As an auto-entrepreneur you will pay social security contributions at the rate of 21.3% of gross rental income, although chambres d'hôtes and rural gîte owners pay at the rate of 12%.
• If you adopt the regime réel you will pay social security contributions that total around 45% on actual profits.

4.3.3. VAT

VAT will only need to be charged where at least three of the following services are provided to the tenant - breakfast, daily cleaning, reception service, linen service.

From our experience whether or not this occurs depends a lot on how regularly the services are provided, the basis on which the occupants are charged, and just how business is described to the tax authorities! An all-inclusive charge does reduce the risk of VAT having to be applied.

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.