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Taxation of Lump Sum Pension Payments

Lump sum retirement pensions are taxable in France, although subject to particular rules.

Historically, the taxation of lump-sum pension income has been a vexed question in France, as such sums are not automatically tax free as is the case in the UK.

Until 2010 there was actually no specific mention of pension payments made in the form of capital, which were merely taxed as an exceptional non-recurring payment, under which the tax due could be spread over a number of years.

Since 1st January 2011 such payments have been subject to specific provision 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 recent 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, although subject to qualifying conditions in two cases.

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. This option is only likely to make sense if your marginal rate of taxation is no higher than the lowest rate of 5.5%.

ii. Exceptional Payment - 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.

iii. Quota Part - You can request the sum 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 which is paid in a single payment.This is called the système du quotient. (Article 163-0 A Code général des impôts). To qualify the payment must be greater than the average of total net taxable household income over the previous 3 tax years.

iv. Fixed Rate - You can opt for the whole of lump-sum pension to be taxed at a fixed rate of 7.5%. This fixed rate option is called the prélèvement forfaitaire libératoire. (Article 163 bis Code général des impôts). The option 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'.

The option to be taxed at a fixed rate superseded regulations introduced several months previously, under which lump-sums were to be assessed on the basis of 1/15th of the payment being added to your other taxable income in the year, with an exemption for payments under €6000. The effect of introducing the PFL measure was to render inoperative this legislation, which has not ever come into force.

Whichever option you choose, the pension is subject to a 10% allowance before becoming liable to tax. 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.

You are strongly advised to seek professional advice on these options, as the calculations and impact are not as self-evident as they may seem.

Eligible/Exempt Pensions

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 in France.

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.

Under the Double Tax Convention between the United Kingdom and France 'government service pensions' payable from the UK are taxable solely in the UK. 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 (if not tax free) where the pension is in excess of the UK personal allowance and that you may be liable for the payment of some French income tax on the pension, although you would be completely exempt from social charges.

Although recently published guidance from the French government on the taxation of lump sums does not say anything specific about this exemption, under Article 55 of the French Constitution all internal laws are subject to international treaties and laws. Indeed, the circular itself states that the regulations apply, sous réserve de l’incidence des conventions fiscales.

Social Charges

Lump sum payments other than government service pensions are liable to social charges at the rate of 7.1%, but partially deductible against income tax (4.2%) except where you opt for Option 4.

The social charges are payable on the gross sum, before deduction of the 10% allowance.

They are payable at a reduced rate of 3.8% if you pay less than €61 in income tax, and exempt from the social charges if your income would mean you would be exempt from the taxe d'habitation. Whether you would be eligible for such relief would depend on the amount of the lump sum and other income in the year, and your family circumstances.

Neither are social charges payable on your pension if you are not affiliated to the French health system. That is to say, if you are otherwise covered by an S1 or you have private health insurance.

For those countries outside of the EEA, double taxation treaties may also exempt pension liability to social charges.

Vincent Molloy, pensions consultant at specialist French financial advisers Siddalls says, “The French taxation treatment of UK pension scheme lump sums is a relatively new development and feedback we have received from existing clients suggests the options available and the way they are applied is still open to interpretation by individual local tax offices. We are continuing to monitor developments and hope to see a greater degree of clarity and consistency emerging as the rules and regulations bed down”.

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This article was featured in our Newsletter dated 05/02/2013

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