A new tax treaty between France and the UK came into force on 18 December 2009. Virginie Deflassieux of French tax advisors PKF Guernsey summarises the changes.

Scope of the Treaty

The social charges Contribution Sociale Généralisée (CSG) and Contribution au Remboursement de la Dette Sociale (CRDS), as well as the additional taxes to French corporation tax, are clearly included in the scope of the new agreement.

The term “resident of a contracting state” where the State is France, now expressly includes partnerships or other groups of persons which are not liable to French corporation tax and have their seat of effective management in France.

Rental Income

The article dealing with this type of income now specifically includes shares or other rights in a company or other legal entities (partnerships, trusts etc), which give an entitlement to enjoy immovable property situated in a contracting state. The latter is allowed to tax such income under the terms of the treaty, subject to the terms of the specific articles dealing with business profits and independent personnel services.

Dividends, Interest and Royalties

The articles concerning the payment of dividends, interest or royalties and other income now include a general clause of nullity against any abusive use of the rules they establish, i.e. if it was the main purpose, or one of the main purposes, of any person concerned with the creation or assignment of the shares or other rights/debt-claim/right or property in respect of which the dividend/interest/royalties is paid to take advantage of the Article by means of this creation or assignment.

Capital Gains on the Sale of Real Estate

If the underlying assets of trusts and partnerships consist principally of immovable property, the gain arising from the disposal of any interest in such entities may be taxed in the country in which the real estate is situated.

The loophole which applied under specific circumstances to a limited company owning French real estate (so long as it did not have a fixed establishment in France) is closed under the new treaty.

Capital Gains Tax on UK Properties by Residents of France

The previous treaty contained a loophole which lead to the double exemption of any gains arising on the sale of a UK property in the hands of individuals with a non-UK resident and not ordinarily resident status, provided that the taxpayer does not move back to the UK within 5 years of leaving. This loophole ceases under the new treaty through a clause which states that France may tax the gain.

Any double taxation is eliminated by a tax credit equal to the amount of tax paid in the UK on that gain. As there is no UK liability in this context, there is effectively no tax credit against the French tax liability.

This means that now, any gain realised on the sale of a UK property by a resident of France is assessed and taxed according to the French capital gains tax rules.

UK Pilots

The same tax credit mechanism applies to earnings received from a UK company by pilots, ship crews, etc. who are based in France.

For people in this situation, the French tax bill will be worsened since the French rule only allows a tax credit equal to the amount of UK tax paid.

Pilots generally pay tax in the UK only on the earnings representing the flight hours in UK skies, so for some pilots the UK tax charge is fairly low compared to their annual earnings.

With the new treaty, France is now effectively taxing the income or portion of income that used to escape both UK and French taxes.

On the other hand, where France offers a tax credit equal to the French tax payable, the income so treated is almost totally exempt in France.

It is taken into account to determine the overall rate of French income tax applicable to income taxable in France, but the portion of tax liability for the particular income exempt under the treaty is deducted in full.

This is the case for UK rental income received by a resident of France.

Social Charges

Nevertheless, there is an area that has yet to be clarified by the French authorities concerning the impact of the CSG, CRDS and PS on certain UK sources of income which under the old treaty escaped the scope of these extra charges.

For instance, it is difficult to conceive that the French authorities will effectively levy those charges on UK rental income or UK pensions.

If they did they would technically have to grant the deductible portion of the CSG.

In addition, and as a result of a decision from the European Court, the CSG and CRDS charges can only apply to British pensions if the pensioner is resident in France, but also registered under the French social security regime.

Those covered under form E121 (or other E forms or privately) are not classed as registered under the French social security regime and therefore their pension should normally escape these extra charges.

When we pointed out these issues to the department responsible for the drafting of the Double Tax Treaty they implied that these had not yet been addressed but they hoped to clarify the matter before the end of 2010 as indeed the new treaty will affect 2010 income.

Wealth Tax

Residents of France for tax purposes are exposed to French wealth tax on the net value of their worldwide assets, including the value of any real estate or rights in real estate outside France.

The new agreement excludes non-French assets from the wealth tax computation for five years following the permanent move to France. Under the treaty this only concerns UK nationals who are not also French nationals.

If the taxpayers leave France and remain outside France for at least three years, the five-year exemption applicable to non-French situs assets applies again. This temporary exemption is now in fact granted to all newcomers to France, regardless of their nationality, from 6 August 2008 through a change in French domestic law.

The text of the new treaty is available in the UK / France Double Taxation Convention.

Those seeking advice, French tax return completion, or simply a review of their present French tax affairs to verify that the correct tax treatment has been applied, can contact Virginie Defassieux at french.tax@pkfguernsey.com.