French Social Charges and UK Pensions
Tuesday 04 November 2008
The French authorities are toughening their stance on the taxation of some expat early retirement pensions that have to date been able to escape payment of the French social charges.
Each autumn the French tax authority sends out a demand for the payment of the contributions sociales, a collective term used to describe three different social charges:
- Contribution Sociale Généralisée (CSG)
- Contribution au Remboursement de la Dette Sociale (CRDS)
- Prélèvement Social (PS)
Although these social charges are not part of the French income tax system, they are imposed on most sources of revenue, including income from abroad.
If you are employed or self-employed in France, you will pay the charges on your employment or business income during the course of the year, along with your other social security contributions.
A separate demand is also made each autumn to those in receipt of an early retirement pension, investment income from abroad, as well as French or foreign rental income.
The social charges are currently payable at the rate of 7.1% on early retirement pensions, and at the rate of 11% on rental, investment and savings income, which will increase to 12.1% next year. They are, in part, deductible against French income tax.
If you are an EU national of retirement age (or on long-term invalidity benefit), you are not liable for the charge on your pensions, provided you have health cover through an E121.
Private sector early retirement pensions are liable for the charge, but whilst some in this group pay all or some of the charge on their pension, others escape it.
We have received numerous e-mail enquiries in the past couple of weeks from expats querying their liability to this charge.
The social charges are a frequent source of complaint by expats and their advisors, and incorrect assessments are widespread.
However, from the evidence we have seen, these mistakes cut both ways, with probably as many expats underpaying as those who seem to pay too much.
The administration of these charges seems to occur in a completely Kafkaesque world. French tax officials are often as bemused as taxpayers about the application of the law in relation to expat early retirement pensions.
The problem stems, in part, from the unclear legal status of the social charges. Are they part of the income tax system, or are they social security contributions? If the former, then the double taxation treaty between France and UK would seem to prevent anyone having to pay both income tax in the UK and the social charges in France on their early retirement pension and other income.
However, the French authorities do sometimes seem to want to play it both ways, arguing where it suits them that the social charges are part of the system of social security contributions and, therefore, payable by those resident in France.
Strictly speaking, the only early retirement pensions not liable for the social charges are public service pensions taxed in the UK, those pensions below a certain income threshold, and those early retirees not covered under a French social security regime. That is to say, holders of an E106/E121, and (technically) those covered privately for health insurance.
In practice, the rules are not always applied in the correct manner by the tax authorities, and there are many expats who feel they should be exempt when they have paid some or all of the charges.
There is often confusion, in particular, as to what constitutes a 'public service pension', with some expats wrongly thinking that they should be exempt from the social charges, when they are liable.
Some expats also complete their French tax return incorrectly, with the result that they may well be wrongly assessed. Indeed, it seems from what we have learned, some readers do not even declare their pension income on their French tax return.
Whilst you may be exempt from the contributions sociales on your retirement pensions if you hold an 'E' form, or you are insured privately for health, or on a public service pension, your total worldwide income is used to determine the rate of income tax that applies to other income.
Social Charge Collection Procedures
One of the main reasons why many early retirees on private pensions escape payment of the social charges would appear to be because of the bizarre tax collection arrangements that are in place in France, although it looks as though that may soon change.
Depending on the type of income, French social charges are collected in a different way.
If you have savings and investment income in France, the charges may be deducted at source by the bank.
The French tax authority (Impôts) is responsible for collecting the social charges on French and overseas rental income, as well as savings and investment income earned abroad.
However, the French social security collections agency URSSAF is responsible for collecting the CSG on early retirement pensions.
As expat early retirees in France are not automatically registered with URSSAF, then no demand for CSG on their pension will have been received by them!
Only those early retirees who voluntarily declared their pension income to URSSAF will have received a demand for payment of the CSG.
There are number of readers who have pointed out to us that they have only been charged the CRDS element of the contributions sociales on their early retirement pension. This charge is payable at the rate of 0.5%.
The reason for this apparent anomaly is because the CRDS is collected by the tax authority, whilst it is URSSAF who collect the CSG. Pension income is not liable to the PS element of the social charge.
From the French point of view, the procedure makes perfect sense, for CSG is considered by the French authorities as a social security contribution. Except that it does mean expat early retirement pensions are not always caught in the net.
We asked Virginie Deflassieux, Senior Tax Manager with French tax consultants PKF Guernsey for her views on the situation. She stated:
The French authorities are well aware that certain foreign retirement pensions have been escaping the charges largely because of the inconsistent collection method in place as described by you. However, we believe this situation is going to change.
We have been recently dealing with a number of claims against unfair CRDS levies on such pensions and have been told by tax inspectors that, this year, instead of considering each case individually (which would take too long) they have simply assessed all foreign pensions for CRDS. It was also made clear to us that they were expecting those who should not be taxed to voice their concern and produce justification like an E121 etc. They are thus relying on this strategy to "sift through" those who are liable, but who have never been assessed so far, and those who may genuinely claim an exemption.
We have noticed in our recent dealings with the authorities that there is a clear intention to also review the assessment of all sources of foreign income from an income tax point of view and control residence criteria more aggressively.'
In the light of these revelations, what should expats do?
The advice of Virginie Deflassieux is that, provided you have correctly declared your income to the French tax authority, there is nothing more than you should be expected or required to do.
If you do not declare your pension income (or other sources of foreign income), on the grounds that you hold an E121, or it is a public service pension, we suggest you take advice from your accountant on this practice.
Even those of retirement age, or on a public service pension, are required to declare their pensions on their French income tax return, although there is no suggestion that for them the rules of the game are about to change.
Conversely, if you feel you have been overcharged, then you should present a copy of your E121 to your tax authority, who should then cancel the charge.
You can also read more about the social charges in our guide to Tax in France.
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