3.4. What Income is Taxable in France?

i. ‘Worldwide Income’

If you become resident in France you need to declare your worldwide income from all sources.

Accordingly, your personal income tax declaration needs to include salary, pension, rental income, investment income, interest on savings, and income from business activities if not otherwise subject to French company tax, called Impôts sur les Societiés.

Some income is excluded, notably some French social security payments, certain French bank savings schemes . and some concessions for apprentices and students.

In addition, under tax treaty agreements, income earned outside of France taxed in the country of origin should also get at least partial relief.

Nevertheless, this foreign income will be added to your French income to form the base for calculating liability to income tax in France.

The elimination of double taxation on income taxable in the United Kingdom (and many other countries) is made through a tax credit corresponding to the French tax that would have been paid.

Accordingly, you may only get partial relief against income tax paid outside of France, although it will depend on your circumstances.

If you are resident in France, but earn business or salaried income from both within and outside France, then you may be obliged to pay obligatory health insurance charges on the foreign income. This may occur if you pay income tax outside France on this income but you are affiliated to the French health system. You can read more at Resident or Non-Resident?

ii. UK Pension Income

If you are resident in France and in receipt of a State Pension, private sector pension, or annuity from the UK, it is taxable in France.

Initially, for those from the UK, when you relocate to France you will be taxed at source by HM Revenue and Customs. You will later need to make an application to be taxed in France and to receive a rebate of tax paid in the UK.

You can apply to the HM Revenue & Customs to obtain tax relief at source.

You can also contact their Centre for Non-Residents on 0044-151 210 2222 from outside the UK, or 0845 070 0040 from with the UK.

Those in receipt of a government service pension from the UK have no choice in the matter, as the pension is taxed at source in the UK.

Nevertheless, you will still need to declare the gross income on your French income tax return but get advice on how to complete the form, as errors are frequently made.

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 where the pension is in excess of the UK personal allowance and subject to tax.

You will receive your normal UK personal tax allowance against your government service pension. If you are also in receipt of a State retirement pension from the UK taxed in France then you will also benefit from the allowances granted in France on this pension to someone who is retired.

A ‘government service pension’ is paid to former members of HM Forces, ex Civil Service and Foreign and Commonwealth Office employees, as well as ex local authority employees. National Health service pensions are not considered to be a ‘government service pension’.

Those in receipt of pension income should read our consideration of your potential liability to the social charges in France, as your liability to this tax will depend on your pensionable status.

As a general rule, the tax credit should ensure that government service pensions and UK retirement pensions accompanied by an S1 health exemption certificate do not incur social charges on their pension income.

Since 2011 lump sums paid on retirement to expats living in France have been liable to French income tax, although subject to particular rules.

Specific provision is made 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 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.

1. i. Tax Bands — 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. If you elect for this option the tax liable can be paid over five years.
2. ii. Four Years — You can request that the lump sum is taxed as an ‘exceptonal 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 .
3. iii. Quota Part — You can similarly request income tax 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. This is called the système du quotient .
4. iv. Fixed Rate — You can opt to 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 ).

There are particular rules governing eligibility to opt for the prélèvement forfaitaire libératoire.

a. It is only available where 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’.

b. It is only available where expressly demanded, when the decision is then irrevocable.

You are strongly advised to take professional advice on these options, as the calculation for each option is not as self-evident as it may seem.

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.

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.

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. That said, declaring such income as a ‘pension’ is entirely within the rules.

Government service pensions payable from the UK are taxable solely in the UK, with double taxation avoided on the basis as described above. This may mean you are liable for the payment of some French income tax on the pension, although you would be completely exempt from social charges.

One approach to the declaration of a lump service government service pension payout is simply to declare it as revenue income, not a capital payment, which means it is simply then revenus exonérés, effectively Option 1 of the 4 options listed above. On this you need to take professional advice, as local offices have their own interpretation of the rules.

Lump sum payments other than government service pensions are liable to social charges at the rate of 7.1%, although deductible against income tax at the rate of 4.2%.

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.

As we say above, 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.

Clearly, to avoid your pension lump sum being taxed it pays to take it before you become resident in France, although we appreciate this is not an option that is suitable for everyone.

iii. Foreign Rental Income

If you become resident, but continue to receive letting income from property in the UK, this income is ordinarily taxable by the UK authorities, to whom you will need to make a tax declaration. You will be entitled to your UK personal tax allowance.

However, you will also need to declare the income to the French tax authorities, and you will receive a tax credit equivalent to the tax you would have paid in France on the income. You will also receive a 100% tax credit against liability to social charges in France (assuming no business registration in France).

You can make application to receive the income without tax deduction by HM Revenue and, depending on your circumstances, it may pay you to opt for this option.

More details on relief in the UK for non-resident landlords can be found by visiting Tax Relief for UK Landlords.

iv. Foreign Savings Income

If you earn foreign savings or investment income, then this is entirely taxable in France. although you will get relief against tax paid elsewhere.

You can generally elect to have your foreign savings income paid gross to you by your UK or other overseas bank.

Indeed, the French tax return requires that you declare the gross level of interest earned, not the net amount, so it is far easier to elect to be taxed entirely in France, rather than having to reclaim from the UK (or elsewhere) the tax you may have already paid on the earned interest.

Even if you wished to do so, it is not easy to get away with not declaring your foreign savings interest to the French tax authorities.

Under the European Tax Directive Member States of the EEA agreed to exchange information about bank customers who earn interest in one country but live in another.

This means that if you hold savings in a bank account in the EEA other than in France, the amount of interest earned on the account will be reported to the French tax authorities. Offshore accounts are shielded from this rule, but you are still legally required to declare the income.

France has also entered into separate tax exchange agreements with many so called ‘tax haven’ countries, so there is now a far greater chance of undeclared income in these countries being discovered, although you would normally need to be subject to a tax investigation for this to happen.

You can read more about these regulations in our pages at European Tax Directive.

You may find that your bank will ask you for your French income tax registration number.

v. French Rental Income

You will need to declare all rental income earned in France. The basis of taxation will depend on whether it is furnished or unfurnished rental income.

Information and advice and the taxation of rental profits can be found in our comprehensive guide to Taxation of Rental Income in France.

vi. French Business Income