Guide to French Income Tax
3. Liability to French Income Tax
- Who Pays Taxes in France?
- Are you Resident or Non-Resident?
- What is your Fiscal Household?
- What Income is Taxed in France?
3.4. What Income is Taxed in France?
3.4.I. Worldwide Income
If you become resident in France you need to declare your worldwide income from all sources.
Accordingly, your personal income tax declaration needs to include salary, pension, rental income, investment income, interest on savings, and income from business activities if not otherwise subject to French company tax, called Impôts sur les Societés.
Some income is excluded, notably some French social security payments, certain French bank savings schemes, and some concessions for apprentices and students.
Declaring all your worldwide income does not mean it will all be taxed in France.
Under tax treaty agreements, income earned outside of France taxed in the country of origin should also get at least partial relief, if not full relief.
Nevertheless, this foreign income will normally be added to your French income to form the base for calculating the rate that applies on income that is taxable in France.
The elimination of double taxation on income taxable in the United Kingdom (and many other countries) is made through a tax credit corresponding to the French tax that would have been paid.
Accordingly, you may only get partial relief against income tax paid outside of France, although it will depend on your circumstances and the tax treaty arrangements.
3.4.2. UK Pension Income
i. State and Private Pensions
If you are resident in France and in receipt of a State Pension, private sector pension, or annuity from the UK, it is taxable in France.
Only occupational, stakeholder and personal pensions where tax relief has been granted against contributions or the lump sum is tax free are eligible to be taxed as pension income.
Unregistered pension schemes that grant no tax relief in your home country are taxed as investment income. Such ineligible pensions are normally referred to in the UK as 'Employer-financed retirement benefit schemes (EFRB)', sometimes used by owner-managers. That said, declaring such income as a 'pension' is entirely within the rules.
Some expatriates convert their pension into a QROPS, but this is generally quite unnecessary and may cause additional tax complications in France. QROPS are taxable in France in the normal manner. If your financial advisor is suggesting you take out a QROPS, get a second opinion, and ask what your advisor is making out of setting one up for you!
Initially, for those from the UK, when you relocate to France you will be taxed at source by HM Revenue and Customs. You will later need to make an application to be taxed in France and to receive a rebate of tax paid in the UK.
You can apply to the HM Revenue & Customs to obtain tax relief at source. You need to get your local tax office to signed and stamp the form. Since Brexit there is no longer a French version, and we hear reports of some tax offices being unwilling to sign an English language version. However, a visit to their local office with a polite request for their cooperation should normally be enough to do the trick.
You can also contact the Centre for Non-Residents on 0044-151 210 2222 from outside the UK, or 0845 070 0040 from with the UK.
It is not uncommon for HMRC do do an annual review of your tax coding, when errors can occur, particularly with missing or erroneous information from pension providers, when you will then need to contact HMRC to reinstate your correct tax coding.
In terms of US pensions, under the double taxation treaty with France US pensions are only taxable in the USA, with Article 18 of the agreement stating:
"Amounts paid under the social security legislation or similar legislation of a Contracting State to a resident of the other Contracting State or to a citizen of the United States, as well as amounts paid under a pension plan and other similar remuneration arising in either Contracting State in respect of previous employment to a resident of the other Contracting State, in the form of periodic payments or a lump sum, shall be taxable only in the former State. For the purposes of this paragraph, payments under a pension plan and other similar remuneration shall be deemed to arise in a Contracting State only when paid by a pension plan or other retirement plan established in that State.”
However, your US pension income will be included in the tax assessment of your France taxable income (if any).
ii. Government Service Pensions
Under the UK/France double tax treaty, government service pensions from the UK are taxed at source in the UK, as is normally the case with other countries in Europe.
A 'government service pension' is paid to former members of HM Forces (including widows), ex Civil Service and Foreign and Commonwealth Office employees, as well as ex local authority, police, teachers, fire service and Forestry Commission employees. National Health service pensions are not considered to be a government service pension except where they are paid by a local authority. Neither are university pensions, except for those from Oxford University.
If you are in any doubt, as there are various minor exceptions, you should read the UK government guidance on the classification of pensions can be found at Government or Non-Government Pensions.
Nevertheless, although taxed at source you will still need to declare the gross income on your French income tax return but get advice on how to complete the form, as errors are frequently made.
The mechanism by which double taxation is avoided is through a tax credit for 100% of the French tax attributable to the proportion of total household income represented by the UK government pension. This may not fully recover any UK tax already deducted where the pension is in excess of the UK personal allowance.
You will receive your normal UK personal tax allowance against your government service pension. If you are also in receipt of a State retirement pension from the UK taxed in France then you will also benefit from the allowances granted in France on this pension to someone who is retired.
iii. Lump Sum Pension Payments
Lump sums paid on retirement to expats living in France are liable to French income tax, although subject to particular rules.
Specific provision for the taxation of lump-sums is made through Article 59 loi n° 2010-1658 du 29 décembre 2010 de finances rectificative 2010 and Article 41 LOI n° 2011-900 du 29 juillet 2011 de finances rectificative 2011.
The result of this legislation is that those resident in France who receive a lump-sum retirement pension that is taxable in France now have four options from which to choose.
i. Marginal Rate - You can choose to make no specific provision and have the lump sum taxed in accordance with tax rates and bands applicable at the time of receipt.
ii. Four Years - You can request that the lump sum is taxed as an 'exceptional payment' under which you can divide the sum by four equal parts, with each quarter part added to your other income for each of the four years. This is called the système de l'étalement. This option ceased available from 1st January 2020 for payments made from this date.
iii. Quota Part - You can similarly request income tax is calculated by adding a quarter of the net taxable lump sum to your other net taxable income and then by multiplying by 4 the tax then due. By this means the lump-sum payment does not push you into a higher tax bracket. This is called the système du quotient.
iv. Fixed Rate - You can opt for the whole of lump-sum pension to be taxed at a fixed rate of 7.5%. The lump-sum is not then taken into account in determining the tax payable on other income. This fixed rate option is called the prélèvement forfaitaire. It is only available if you receive the whole of the lump sum to which you are entitled, so that no part is deferred for payment at a later date, known as 'flexible drawdown'. Accordingly, if you are considering taking your pension in more than one lump sum payment you cannot use this option. The other condition is that the contributions you and your employer paid towards the pension were tax deductible, or the lump sum was tax free, which is the case with most UK pensions. It is also only available where expressly demanded, when the decision is then irrevocable.
Whichever option you choose, the pension is subject to a 10% allowance before becoming liable to income tax. So the 7.5% fixed rate method of taxation actually equates to a rate of tax of 6.75%.
Contrary to the normal rules on pension income, under which the 10% is capped at a maximum sum, there is no ceiling on the amount of the 10% for lump sum pension payments, although you would need to confirm this is the case for either option 1 or 2, as the regulations are imprecise in relation to these two options.
Lump sum government service pensions remain exempt from taxation in France. One approach to the declaration of a lump service government service pension payout is simply to declare it as revenue income, not a capital payment, which means it is simply then revenus exonérés, effectively Option 1 of the 4 options listed above.
You are strongly advised to take professional advice on these options.
iv. Social Charges
In addition to income tax, most pensions are liable to social charges.
Lump sum pension payments are liable to social charges at the rate of 9.1%, payable on the gross sum, without deduction of the 10% allowance.
However, lump sum government service pensions are exempt from the social charges, although they are frequently incorrectly taxed by local tax offices, who impose the social charges. We have published Newsletter articles about the problem, which you can read at Taxation of Government Service Pensions and How should a Government Service Pension be Taxed
In addition, if you hold an S1 certificate of health exemption, or you are covered for health entirely by a private health policy, your pension lump sum from whatever source is also exempt from social charges.
For those countries outside of the EEA, double taxation treaties may also exempt pension liability to social charges.
Social charges are partially deducible against income tax, which you can read about in our section on social charges.
This means your pension is reduced by the amount of deductible CSG you have paid, before income tax is calculated. However, this deduction does not apply to lump sums taxed at the fixed rate of 7.5%, although it does apply in relation to the other options.
The method used for recovery and deductibility of the social charges is a little complex, on which advice needs to be taken, as it may impact on the level and timing of your liability.
3.4.3. Foreign Rental Income
If you become resident, but continue to receive letting income from property in the UK or most other countries, this income is ordinarily taxable by your home country tax authority, to whom you will need to make a tax declaration. In the UK You will be entitled to your personal tax allowance, as normally applies in most other countries.
However, you will also need to declare the income to the French tax authorities, which will be added to your other income to determine the rate that applies to your total income. You will receive a tax credit equivalent to the tax you would have paid in France on the income. This tax credit may be higher or lower than the actual tax you pay in your home country; it will depend on your circumstances. The fact that you may have paid no income tax in your home country on the income (as perhaps below personal allowance) is irrelevant. You will also receive a 100% tax credit against liability to social charges in France so no such charges will be payable on the income.
Nevertheless, many local tax offices incorrectly impose social charges on foreign rental income, an problem we set out in an article in our monthly Newsletter at Tax Errors on UK Rental Income.
You can make application to receive the income without tax deduction by HM Revenue and, depending on your circumstances, it may pay you to opt for this option.
More details on relief in the UK for non-resident landlords can be found by visiting Tax Relief for UK Landlords.
You can also set-off losses on a foreign-owned property against liability to French income tax - French Tax Rules on Foreign Rental Losses.
3.4.4. Foreign Savings Income
If you earn foreign savings or investment income, then this is entirely taxable in France, although you will get relief against tax paid elsewhere.
You can generally elect to have your foreign savings income paid gross to you by your bank.
Indeed, the French tax return requires that you declare the gross level of interest earned, not the net amount, so it is far easier to elect to be taxed entirely in France, rather than having to reclaim from the UK (or elsewhere) the tax you may have already paid on the earned interest.
Even if you wished to do so, it is not easy to get away with not declaring your foreign savings interest to the French tax authorities.
Under the European Tax Directive Member States of the EEA agreed to exchange information about bank customers who earn interest in one country but live in another.
This means that if you hold savings in a bank account in the EEA other than in France, the amount of interest earned on the account will be reported to the French tax authorities.
France has also entered into separate tax exchange agreements with many so called 'tax haven' countries, so there is now a far greater chance of undeclared income in these countries being discovered.
You may find that your bank will ask you for your French income tax registration number.
3.4.5. French Rental Income
You will need to declare all rental income earned in France. The basis of taxation will depend on whether it is furnished or unfurnished rental income and whether you are taxed on the basis of a notional cost allowance or actual costs and income.
Information and advice and the taxation of rental profits can be found in our comprehensive guide to the Taxation of Rental Income in France.
3.4.6. French Business Income
The taxation of business income is dealt with elsewhere in our Guides, but if you run a micro/auto-entrepreneur business in France you will need to declare the turnover/profits with your personal income tax return.
You can read more in our Guide to Micro-Entrepreneur Business in France.
If you run a limited company your company tax return is submitted separately from your personal income tax return.
Many expats in France trade in the sale of second-hand goods on-line. The tax rules governing this activity are set out in our France Insider article at Taxation of Second-Hand Sales in France.
3.4.7. Expatriate Executives
Partial relief from income tax is available to individuals who relocate to France to take up employment in a company based in France.
You can read about the scheme in France Insider at Tax Relief for Expatriate Executives.
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