4. Taxation of Property Rental Income in France
4.3. Furnished Lettings
The taxes that we will consider in this section are income tax, social charges and VAT.
Separately with this page you need to read our page on Business Registration.
We also have a separate page on running a chambre d'hôte as a micro-entrepreneur, which you may find it useful to read in conjunction with this page.
2. Income Tax
There are three different income tax regimes for the taxation of profits from furnished accommodation, and small landlords can choose the regime under which they wish to be taxed.
The two main tax regimes are micro-entreprise and regime réel.
In addition, if you are business registered as a micro-entrepreneur you can adopt the regime of micro-fiscal.
Separately, rental income from letting out a furnished room in your house is exempt from tax, subject to certain conditions, which is considered in the next section of this guide, under 'Lodgings'.
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 do not need to be a registered business to be taxed in this way, although you will be given a registration number for administrative purposes.
You will be eligible for Micro-BIC tax status if your gross revenues from furnished lettings do not exceed a fixed amount each year.
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.
The standard allowance is 50% of gross income and the turnover maximum is €70,000 (2019) but also applicable for income received 2017).
Owners of accredited rural gites or properties (meublés de tourisme classés) or chambres d'hôtes benefit from a higher fixed percentage cost allowance of 71%, and a turnover limit of €170,000 (2019 for income received 2018).
If you are already registered with the social security system as a salaried employee, you have the choice of continuing to operate without business registration and simply pay social security contributions through the main general regime. In such circumstances you are granted a tax allowance of 60% (or 87% if a meublé de tourisme classée) against social charges and income tax on such rental income.
Merely signing up with the 'Gîtes de France' network would not be enough to obtain an enhanced tax status of meublé de tourisme classée, which is only accorded to those properties classed through the French national tourism development agency, called 'Atout France'.
Under the system of classification meublés de tourisme are subject to a ranking of 1 to 5 stars, according to a points system.
There are 112 control criteria covering three main areas of the property - equipment and facilities, customer service and accessibility and sustainable development.
In order to obtain a ranking you need to arrange for one of the accredited bodies from 'Atout France' to undertake an inspection, following which you are offered a certificate of classification, which you are free to accept or refuse.
The evaluating body gives you a certificate in the month following their visit. The inspection certificate includes a proposal for a decision on classification of your furnished to the category mentioned in the inspection report.
The cost of the inspection varies by area and type of property, but is not infrequently several hundred euros.
All of this means you are taxed on 50% or 29% of gross rental income, depending on the type of furnished 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 and total income.
In short, income from furnished lettings is taxed as personal income tax, but under the rules of Micro-BIC.
If your earnings are modest, 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).
If you are business registered as a micro-entrepreneur you can elect to pay a fixed rate of taxation on your gross rental income, either 1% or 1.7% (2019), depending on the nature of the accommodation.
You can read about this form of taxation in our guide to micro-entrepreneur.
For the 2019 return (2018 income) we have prepared some basic guidance for those who wish to declare rental income from furnished lettings in France, which you can find at: Income Tax Return 2019 for Furnished Rental Income.
2.iii. Régime Réel
If your actual costs are higher than 50% or 71% (as appropriate) of gross revenues, then you would be better off electing to be taxed under a system called régime 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 a micro-entrepreneur.
Under the régime réel your tax liability is determined after deducting your actual eligible costs against your gross rental income.
Unless you are affiliated to an accredited accountancy body or accountant (centre de gestion et associations agréés/expert comptable agréés) the tax authority will increase your reported gross income by 25% for the purposes of assessing your liability to income tax. A tax reduction of €915 is available if you are affiliated.
Eligible 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.
Accordingly, if you buy a property for letting you can offset the interest costs against the rent if you adopt the régime réel.
You can also deduct the fees associated with taking out a loan, as well as life insurance premiums payable to guarantee the loan.
However, you cannot deduct agents and notaire fees associated with acquisition of the property.
Nevertheless, of potential substantial benefit, an allowance for depreciation of the property and effects is available, which is not possible with rental income from unfurnished lettings. Land is normally depreciated at 20%pa and property at 2%pa, but there is scope to adjust to suit your circumstances.
There are particular rules governing how depreciation can be used which you need to discuss with your accountant, as there are limitations how it can be used in creating losses. Some depreciation may not be deductible if it generates a loss. Thus, on rental income of €10,000, running costs of €6,000 and depreciation of €5,000, only €4,000 of depreciation would be permitted in the year. You may wish to set the level of depreciation to ensure you do not fall foul of this rule.
Losses incurred can be rolled over against furnished rental income (only) for up to 10 years, although as a registered professional landlord (loueur en meublé professionnel) you can offset losses against your total income for an unlimited period.
The ability to depreciate the property will reduce the net taxable profit each year, and for those who are not registered professional landlords there is also an advantage on sale of the property as the depreciated book value of the property is not used in the assessment of the capital gain, only the actual purchase cost.
There are important limits on the deductibility of building works.
Not all works of improvement are accepted as a deductible cost, and major construction works are expressly excluded.
The problem for any landlord is establishing the boundary line between these different types of works, and the rule that applies if they are carried out simultaneously, as is frequently the case.
Unfortunately, the law on this matter does not offer a great deal of precision.
Article 31 of the French tax code states that:
"Les charges de la propriété déductibles pour la détermination du revenu net comprennent….. a) Les dépenses de réparation et d'entretien effectivement supportées par le propriétaire……… b) Les dépenses d'amélioration afférentes aux locaux d'habitation, à l'exclusion des frais correspondant à des travaux de construction, de reconstruction ou d'agrandissement."
There are regulations that provide more guidance, but there is no list of works that fall into each category and it is only as a result of case law that some greater level of definition has developed.
We can consider each of the works categories in turn.
Repairs and Maintenance
Repairs and maintenance are defined in the regulations as "work having as their object to maintain or restore a building to good condition and allow normal use for its intended purpose, without changing the solidity, the configuration or original amenities."
They also include "the restoration, repair or replacement of essential facilities to maintain the building capable of being used for its intended purpose."
The regulations state that the mere fact that the expense involved replacing a part or obsolete equipment with more modern equipment is not sufficient to deprive it of its character of expenditure of repair or maintenance.
Where repairs and maintenance are accompanied by improvement works then, depending on the nature of the works, the whole may be considered to be improvement works.
If the latter are, in turn, considered to be part of other major construction works that have been carried out, then they would not be deductible.
Improvement expenses are defined in the regulations as "those that are intended to provide new or improved facilities, an increased level of comfort, or amenities better adapted to modern living, provided the works do not change the structure of the building."
Accordingly, example works that have been accepted as deductible are a new central heating system, new toilet and bathroom facilities within the property, a new kitchen within the property, a lift, and improved drainage system.
The difficulties arise when improvement works are undertaken following major construction works, or simultaneously with such works. In practice it is often difficult to separate the two elements.
The issue frequently turns on the scale of the construction works, leading to the general conclusion that where such works are relatively modest the improvements works would be separated out and accepted as deductible.
Indeed, in some cases, even the construction works may be accepted as deductible. Thus, prima facia, a bathroom extension would not be eligible, although it is quite possible the tax office would allow it if was a sensible solution to the improvement of a property, particularly if there was no alternative. The plumbing works within it would almost certainly be deductible.
Where the construction works were significant and the improvement works merely accessory, the latter have been held to be not deductible.
In addition, in another case, where improvement works could not be separated from other major construction works they were assimilated as the latter and found not to be deductible.
Clearly, in all of this, some careful wording of the estimate and the invoice by the builder might help!
Major Construction Works
Those works that are expressly not chargeable are those which either:
- Make an important change to the structure of the building;
- Improvement works that by their nature are equivalent to reconstruction of the building, or;
- Works that increase the volume or living space of the property.
The reason why major construction works are not admissible is that they lead to an increase in the value of the property, so cannot also be considered to be a deductible expense. Such works are then an eligible allowance against capital gains tax, in the event of sale of the property.
In addition, with a furnished property, you are permitted to depreciate the value of the property, in lieu of deduction of expenditure on major construction works.
Of course, improvement works generally also lead to an increase in value, but such works are accepted as deductible in order to encourage improvement of the housing stock.
Works which have been determined to be non-deductible include full or partial demolition of a building with a view to its reconstruction; change of use of a building involving major reconstruction work; an increase in the number of units in a property involving major reconstruction of many of the structural elements of the property.
In addition, any increase in the size or height of the property is unlikely to be accepted as deductible, save where they are minor and/or necessary for the installation of modern amenities.
However, where an owner converted two en-suite bedrooms into a three-roomed single apartment, without undertaking any major construction works, the works were held to be deductible by the courts.
There are particular rules governing works carried out on certain type of investment properties, such as 'Scellier' and 'Pinel' and to properties within conservation areas under the 'Loi Malraux'. We do not consider such schemes in these notes.
Works carried out on a DIY basis by the landlord are eligible, but only for the cost of the materials.
Local tax 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.
Timing of Works
In relation to an empty property in which building works are carried out to make available for letting for the first time, only those works paid in the year in which the property is let are automatically deductible.
So building works carried out and paid in 2018 for a property let in 2019 would not necessarily be deductible. Only if the building works were paid in 2019 would the costs clearly be deductible.
What this can frequently mean in practice is that the initial costs to prepare a property for letting are not deductible.
One possible solution here is to borrow to fund the acquisition and building works, as interest is tax deductible.
Another solution is to become a registered professional landlord (not just business registered) at the commencement of the first letting period, when you are then able to offset your preparatory costs against your total income for three years. This is not easy to for a modest start-up landlord, as it is difficult to achieve the rental income in the year to obtain this status.
The rule is different for works carried out between lettings, when the tax authority normally allow a period of time for re-letting following works.
The period allowed between lettings is a maximum of two years, but possibly less if demand in the locality for such accommodation was considered to be strong.
The whole issue is often difficult area, and a discussion with your local tax office and/or accountant is advisable before you start any major construction works.
The actual rate of taxation will be that applicable under the normal rules for personal income tax, as above.
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 régime réel, or you are obliged to use it, there is a degree of bookkeeping involved, which you might be wise to do in any event!
For a new business, the option for the régime réel may be made until the date of filing of the first profit and loss statement.
The option for régime réel is valid for one year and tacitly renewed each calendar year for one year. Businesses wishing to waive their option for an actual tax regime must notify the administration of their election before February 1 of the year following the period for which the option was exercised or tacitly renewed.
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.
If you obtain income tax relief for works then it is not possible to also obtain that same relief against capital gains tax, as we set out in Capital Gains on Rented Properties.
If you are considering adopting the régime réel we strongly recommend you take appropriate professional advice, ideally prior to purchase of the property and/or commencement of any major building works.
3. Social Charges/Social Security Contributions
The nature and level of the social charges and social security contributions to which you will be liable with depend on whether or not you are business registered and whether you are affiliated to the health system in France.
i. Not Business Registered
If you are not business registered you will be liable for the social charges (called prélèvements sociaux) at the rate of 17.2% (2019 for 2018 income) on net rental income. That is to say, after deduction of the fixed cost allowance or actual costs.
Nevertheless, since 2019 (for 2018 income) if you hold an S1 or you are non-resident in the EEA you will be exempt from the social charges, although you will pay a 7.5% solidarity tax. You can read about this change at Reform of Social Charges. We shall be updating this page in due course.
In relation to rental income received on UK property for residents of France, this income is taxable in the UK, although the elimination of double taxation occurs by way of a tax credit. In practice, it all amounts to the same thing - you will not pay social charges on the rental income. This exemption also generally applies to most other countries with whom France has a tax agreement.
Many local tax offices wrongly apply social charges to foreign rental income. You can read more about the law, and how you can contest such a charge, in an article we published in our Newsletter at Social Charges on Foreign Income.
ii. Business Registered
If you are business registered as a landlord in France then the basis on which you will be charged social charges/social security contributions will depend on your business tax status.
As an micro-entrepreneur you will pay a fixed percentage social security contribution on gross rental income, and the level of the rate will depend on the nature of the accommodation and services offered.
The rates for 2020 (for 2019 income) that apply are as follows:
- Unclassed Furnished Letting - 22%
- Meublé de Tourisme Classée - 6%
- Chambre d'hôte - 12.80%
If you adopt the régime réel you will pay social security contributions that total around 40% on net profits. There are certain exemptions/allowances for low profit businesses and the rate works out lower on high profit businesses. There is also social security relief for new start-ups for the first year.
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 and classified tourist properties, called les résidence tourisme classées, which we shall cover in due course.
4.4.4. 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.
Chief amongst the schemes are those of 'Scellier', 'Duflot' and 'Pinel' named after the politicians who introduced them.
You are strongly advised to take good professional advice before you invest in one of these schemes. The tax benefits are not as generous as was the case in the past, the market conditions in some developments are not strong, there is frequently criticism of management arrangements, and other conditions are imposed which have reduced their attraction as an investment product.
Next: Unfurnished Lettings
Back: Summary of Tax Regimes
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