Many early retirees face an increase in their French tax bill this year, while those of retirement age will also need to be more vigilant.
The increase in taxation comes about as a result of a change in tax collection procedures.
With effect from 1st January 2012, responsibility for the collection of the Contribution Sociale Généralisée (CSG) on overseas pension income has been transferred from the social security contributions collection agency 'URSSAF' to the French tax offices.
Until now most early retirees from abroad have escaped CSG on their pension income as they were simply not known to URSSAF, with whom there was no clear obligation to register.
It is has been a gaping hole in the process of tax collection that has been well known to the French authorities for years, but who until now have either chosen not to act, or been unable to do so.
So for the first time this year those liable to the CSG will face a charge on their early retirement pension, where previously this tax was not collected.
The charge is at the rate of 6.6%, unless you are eligible for the reduced or nil rate (see below). There is also a charge of 0.5% for 'CRDS', giving a total charge of 7.1%.
The change in the collection procedures has been reflected in changes to the tax return where on the Form 2047 (Déclaration des revenus encaissés à l'étranger) specific provision has been made to record income that is liable to CSG.
Local tax offices are already responsible for the collection of one other element of the social charges, the Contribution au Remboursement de la Dette Sociale (CRDS), so this latest move to rationalise the process is a logical administrative change, if a painful one for some.
Not all early retirees will face the new charge, for you will continue to be exempt on your pension income (only) if one or more of the following conditions applies to you:
i. S1 (E106/E121) Health Certificate - You are covered by an S1 (formerly E106/E121) health certificate of entitlement from the UK (or other home European country);
ii. Private Health Insurance - You have been obliged to take out private health insurance as you have been refused access to the French health system;
iii. Low Income - If your income is below the level that would make you liable for the taxe d'habitation you are exempt from payment;
iv. Government Service Pension - If you receive a 'government service pension', which is by law taxable only in the United Kingdom, then you are granted a tax credit on the pension.
In addition, if you pay less than €61 in income tax then you pay a reduced rate of CSG of 3.8%.
However, Mervyn Simms of French financial advisors Siddalls considers that the change is likely to result in many incorrect assessments being made by local tax offices.
''The exemption from social charges for S1 holders, those with full private health insurance cover, or in receipt of a UK ‘government’ pension is not readily understood by every local tax office. So where your local office is not fully familiar with the rules you could find CSG/CRDS charges applied to your pension income in the 'Avis D’Impôt' assessment you receive after submission of your tax return.
If this happens we suggest you provide your tax office with a copy of your S1 Form or your private medical insurance certificate, to make it clear to them that you are not ‘a la charge’ of the French health system, and therefore not liable for payment of the CSG/CRDS charges,” he says.
If the tax office disputes any such exemption then you should refer them to a range of official regulations on this matter, about which you can read more in our Guide to Social Charges in France.
You may need to use the appeal system against any such decision to impose the charges as we have found some local tax offices can be very obdurate about the issue, despite having the regulations presented to them in black and white!
As well as early retirees, others affected by the change are those with
income from overseas employment/business on which CSG is payable in
Those of State Pension age and holding an S1 or E121 health certificate will continue to be exempt from the charges on their pension income in the normal manner.
However, we are already hearing reports of local tax offices having advised some S1 holders that they will still be taxed on their pension income, irrespective of their S1 status.
So we fully expect there to be many incorrect tax assessments this year, with many of you paying social charges on your pension when the regulations make it abundantly clear that such pension income is exempt.
As we report elsewhere in this Newsletter, the new French President François Hollande is proposing to merge CSG with the income tax system, although early action to bring this about seems unlikely.