Tax Changes for Chambres d’Hotes and Gite Owners in France

Those who let out chambres d’hotes and gîtes in France will be subject to new tax rules from next year. UPDATE: Since this article was published, it seems registered gîtes and chambres d'hotes are to be excluded from these new regulations. We will update further in a later Newsletter. Ed Jan 09

In general, the new regulations are going to make life a little tougher for landlords of all types of furnished accommodation, although it is not all bad news. There are four main changes, which will be effective from January 2009:

i. Professional or Non-Professional Landlord?

French tax law makes a distinction between those who are ‘professional’ landlords of furnished accommodation, and those who are ‘non-professional’ landlords of such accommodation. The distinction has nothing to do with their differing levels of competence(!), but with the level of their revenues. At the present time, any landlord of furnished accommodation who receives more than €23,000 per year in rental income, or whose rental income amounts to more than 50% of their other revenues, are deemed to be ‘professional’ landlords and required to register with the registre du commerce et des sociétés. Those registered as professional landlords receive preferential tax treatment, although they are (generally) also obliged to pay French social security contributions on their rental income. In future, the two conditions of entry into professional status will be cumulative, so that anyone seeking to become a professional landlord will need to demonstrate that they receive at least €23,000 per year in rental income and that this income represents at least 50% of their total revenu professionnel. A number of readers who run chambres d’hotes and gîtes in France have contacted us, concerned that this will imperil their business status, and potentially their affiliation to the French health service. We have spoken to the French Ministry of Finance on this point, and a spokesman advised us that arrangements will be made so as not to penalise those registered as professional landlords prior to 2009, although the details have yet to be published. Quite separately from these changes the government is also introducing a new business and tax status of auto-entrepreneur, whose adherents pay flat rate social security charges on their turnover. The government have stated that owners of chambres d’hotes would be entitled to this status. However, what they have not made clear is whether only professional landlords would have a right of entry, or whether it would equally apply to non-professional landlords. This is potentially of great importance to expats who run chambres d’hotes in France as non-professional landlords, and who need business registration in order to gain access to the health system. We await further clarification on this point from the government, on which we hope to have more news in the next few weeks. Nevertheless, although it may possible to obtain auto-entrepreneur status, it is still going to become more difficult to attain professional landlord status in France (and thereby obtain some of the other tax benefits), simply because of the need to meet the two conditions. Many expats in France have obtained professional status by meeting the 50% income rule, rather than realising €23,000 per year in rental income. You would need to make a substantial investment in order to obtain over €23,000 per year in rental income in France. If you were able to generate this level of income in rent, then there is less cause for concern. This is because, in the calculation of the 50% total income rule, retirement pensions (including early retirement pensions) are excluded. Only income from another business activity or salaried employment is used in the assessment.

ii. Tax Allowance

There is also a reduction in the tax allowance for those on the tax regime of micro-BIC foncier, which is being reduced from 71% to 50%. There is also to be a reduction in the turnover permitted to benefit from the micro-BIC foncier, from €76,000 to €32,000. This means that those who opt for this tax regime will now be taxed on 50% of their gross revenues, whereas currently they are taxed on 29% of their turnover. If this is potentially of concern, you need to consider whether it would be worthwhile to be taxed on the basis of the régime réel, under which you are assessed for income tax on the basis of actual costs and revenues, not on the basis of a standard allowance for costs, as in the regime micro-BIC foncier. If you choose this option, you will need to keep a set of accounting records, but it can actually be a very attractive option, notably by the ability, in most circumstances, to offset mortgage interest against rental income.

iii. Set-Off Losses

Indeed, the situation for those who choose the régime réel will become of greater value next year. At the moment a non-professional landlord of furnished accommodation, taxed on the basis of the régime réel is able to set off losses against future furnished rental income for up to six years. In future, it will also be possible to offset these losses against other income, up to €10,700 per year, so reducing your liability to income tax on your total income. If the total revenues in the year are not high enough to absord this deficit, they can be carried forward against future furnished rental income (only) for up to ten years. This brings the tax treatment of non-professional landlords of furnished accommodation into line with those who let unfurnished accommodation.

iv. Capital Gains

Finally, the sale of a property by professional landlords is currently not subject to French capital gains tax, provided the rental income each year does not exceed €250,000 per year and the landlord has had professional status for at least five years. This threshold rental income figure has now been reduced to €90,000. These new rules have yet to be finally enacted, but when this occurs we shall be updating our Guide to Letting Property in France.

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