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Taxation of Government Service Pensions

There is widespread official confusion over new rules on the taxation of public service pensions, under which some expats face an increase in their tax bill.

The disarray has arisen as a result of the introduction of the new double taxation treaty between France and the UK, which came into force on 1st January 2010.

We have had a number of you write to us stating that your local tax office has ignored tax paid in the UK on your government pension, which it has taxed on a gross basis.

One of those is Tony Murdoch, who lives in the Poitou-Charentes region of France. He says, ‘When I checked my tax notice, it was clear that the tax office had added the gross amount of my wife’s government service pension to our other income, on which the tax calculation was then carried out.'

'When I pointed out that the government pension was taxable in the UK, the official refused to listen to anything I said about the difference between State employee pensions and a retirement pension paid by the State.'

'The official went on to say that the tax notice, which normally arrives in September, might be later this year because of the backlog of changing all French resident UK nationals incorrect French returns for this year!’

Other reports from elsewhere show similar problems. In the Vendée it seems that the Luçon office is not taxing the UK government employee pension, yet the contrary is the case at the Fontenay office.

In the Deux-Sèvres, the St Maixent and Parthenay tax offices are both taxing the government employee pension and giving no tax credit, so the individual is being taxed in both the UK and in France.

In the Gironde, the tax office in Bordeaux is giving a tax credit, but not the full tax that was paid in the UK.

It also seems some local offices are confusing government service pensions with State retirement pensions, and applying the same rules to both of them.

In fact, as far as we can establish, of those mentioned it is only the Bordeaux office that is correctly applying the treaty, under which the rules have actually changed.

Virginie Deflassieux, who is Associate Director at French tax advisors PKF (Channel Islands) Limited, says that ‘The new double taxation treaty changes the basis on which government service pensions are taxed.

Although, under Article 19 of the treaty these pensions remain taxable in the UK, the basis of eliminating the double taxation has changed. Previously, a full deduction for the tax paid in the UK was granted, and the resulting net figure used as the basis for determining the applicable rate of tax payable on French sourced income.

Under the new treaty, the ‘taux effectif’ has been abolished, and replaced with a tax credit, equivalent to the French tax attributable to that income and calculated using French tax rules.

So this means that, in some cases, there will only now be partial relief against liability to French tax for government pensions, for if the tax due in France is higher than that which is paid in the UK, then tax will also be payable in France.’

Contradictory Clauses

It is perhaps not surprising that local officials are getting it wrong, as the new treaty does seem to contain contradictory clauses in relation to the taxation of government service pensions.

Thus, Article 19, section 2 unequivocally states that government service pensions are not taxable in France:

‘Les pensions et autres rémunérations similaires, payées par un Etat contractant ou l’une de ses collectivités locales ou, dans le cas de la France, par une personne morale de droit public, soit directement, soit par prélèvement sur des fonds qu’ils ont constitués, à une personne physique au titre de services rendus à cet Etat, collectivité ou personne morale ne sont imposables que dans cet Etat. Toutefois, ces pensions ne sont imposables que dans l’autre Etat contractant si la personne physique est un résident de cet Etat et en possède la nationalité sans posséder en même temps la nationalité du premier Etat.'

However, the method of eliminating double taxation is given in Article 24, where it becomes evident that pensions are only exempt up to the tax attributable in France:

‘Les doubles impositions sont éliminées de la manière suivante :

a) nonobstant toute autre disposition de la présente Convention, les revenus qui sont imposables ou ne sont imposables qu’au Royaume-Uni conformément aux dispositions de la présente Convention sont pris en compte pour le calcul de l’impôt français lorsqu’ils ne sont pas exemptés de l’impôt sur les sociétés en application de la législation interne française. Dans ce cas, l’impôt du Royaume-Uni n’est pas déductible de ces revenus, mais le résident de France a droit, sous réserve des conditions et limites prévues aux alinéas (i) et (ii) et au paragraphe 4, à un crédit d’impôt imputable sur l’impôt français. Ce crédit d’impôt est égal :

(i) pour les revenus non mentionnés à l’alinéa (ii), au montant de l’impôt français correspondant à ces revenus à condition que le résident de France soit soumis à l’impôt du Royaume-Uni à raison de ces revenus.

In practice, the tax credit method will make little if any difference to most people, but that does not make these clauses any more comprehensible.

Fat Lady Still to Sing

It is clearly going to be interesting to see how all of this develops over the next few years. It could well be that there will be legal challenges to the interpretation of the new tax treaty, as the position regarding government service pensions, in particular, seems contentious.

What is clear for now it that the changes to a tax credit have introduced changes to the way the tax return must be completed. This is certainly leading some tax offices to tax the gross amount, without granting a tax credit.

There have also been changes to the manner in which the social charges are treated, which under the new treaty are considered to be a tax. We await further information on the implications of this change on expat pensions and other earned income (including rents and director's fees) from outside of France.

We shall be updating our Guide to Taxes in France when there is greater clarity and certainty about all of these changes.

Related Reading:

This article was featured in our Newsletter dated 05/10/2011




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