French Income Tax
This page outlines
- Taxable income
- French income tax rates
- French income tax declaration and deadlines
- Unearned income, interest & gains (FLAT TAX)
- French Social Taxes
- Foreign Bank Accounts
- French Income Tax Optimisation
- Contributions to Private French Pension Plans (PERP)
- Special French Tax Advantages for foreigners coming to work in France (Impatrié)
Although France has a reputation for high taxes, income tax is generally no higher than many other developed countries - in particular for couples. Past attempts to propose “excessive” increases have always been rejected by the Conseil Constitutionnel - showing that no French government has unlimited freedom to tax its citizens.
Social contributions on earned income (equivalent to UK Nationional Insurance Contributions) remain unpleasantly high - making France a more suitable home for retirees than those still working. Expats who come to work in France are however offered a number of significant reductions during the first eight years.
The latest Loi de Finances 2021 and Loi de Financement de la Sécurité Sociale 2021 were approved and published on 29th and 15th December 2020 respectively.
Since the significant changes that took place in 2019 (with the introduction of the prélèvement à la source - tax at source) there have been no major changes.
For most higher-rate tax-payers, longer-term savings are still best wrapped within an assurance vie (French life assurance policy) or similar French-recognised wrapper - allowing gains and income to roll up inside without being taxed until withdrawn.
All those living in France are reminded that foreign financial income (bank interest, dividends, gains, etc) must be declared and tax paid “on account” by the 15th of the month following receipt (whereas income arising within French banks will automatically be declared and the tax paid on account for you). This is mandatory except for those below the specified income thresholds (see below).
French Income Tax captures a wide spectrum of revenues, including
- Salaried employment
- Professional & personal company income (BNC / BIC)
- Financial investment income (dividends, interest, etc)
- Property rental income
- Capital gains (property and financial gains)
French residents must declare all such income and gains on a worldwide basis - normally including foreign property income and deducting foreign taxes where specified by the appropriate dual tax treaty. Non-residents normally only need to declare income and gains from French property.
If the taxman considers you've declared insufficient income for the lifestyle you lead (based on an old fixed list of signs of wealth including houses, cars, ... and horses) - he can tax you on estimated income, calculated according to specific rules. The authorities are now allowed to use social media to identify potential signs wealth (such as photos on instagram or adverts on eBay).
FRENCH INCOME TAX RATES
Various deductions are allowed including:
- 10% off salary (within certain limits) (see below for additional deductions for those coming to work in France)
- 40% off dividends (dependent on certain rules) - unless you opt for the 30% flat tax.
Many other deductions can be applied, ranging from employing baby-sitters to home insulation - see below.
To calculate French income tax, add up income for the household, divide by the number of parts (based on household members), apply the rates below, then multiply back by the number of parts.
When calculating the number of parts, note that the first & second child count only as a half-part, whereas the third child counts as a whole part. Live-in grannies usually count for the same as a child.
Please note that there is a limit on the benefit obtained through multiple parts.
According to the Loi de Finances 2021 the revised bands for income received in 2020 are:
- to 10,084€ 0%
- 10,084 to 25,710€ 11%
- 25,710 to 73,516€ 30%
- 73,516 to 158,122€ 41%
- above 158,122€ 45%
If the above calculation results in tax of 2848€ or less (1721€ if single) the tax is reduced by 45.25% less 1289€ (779€ if single).
There is an additional “temporary” French income tax on global (earned or unearned) income above 250000€ known as “Contribution exceptionnelle sur les hauts revenus” - and this also applies to income subject to the above mentioned Flat Tax. The rate is 3% from 250k€ to 500k€ and then 4% thereafter. These thresholds are doubled if you are declaring income as a couple. If income is higher than the previous two years, it can sometimes be possible to calculate on an average basis. These additional taxes are supposed to last until the level of French public debt returns to below 3% - and the latest forecasts at the time of writing imply that this could be soon...
FRENCH INCOME TAX DECLARATION AND DEADLINES
An income tax declaration must be made by all French residents each year on line (contact your local office if you’re unsure of the procedure or your French tax ID - numéro fiscal).
The deadlines for declarations depend on the department where you live :
- 26/5/21 (Departments 01-19 and non-residents)
- 01/6/21 (Departments 20-54)
- 08/6/21 (Departments 55-976)
Access to the online declaration service (www.impots.gouv.fr) is from 8 April 2021.
FRENCH TAX ON DIVIDENDS, BANK INTEREST and CAPITAL GAINS (FLAT TAX)
For all financial income (interest, dividends, capital gains,...), by ticking the appropriate box on the income tax return, French residents can choose between:
- the “flat tax” (taux forfaitaire unique) at the fixed rate of 12.8% (+17.2% social charges) - resulting in an overall “flat tax” of 30%. In this case no reductions (abattements) are available. Very high earners may also be subject to the additional 3-4% Contribution exceptionnelle sur les hauts revenus mentioned above.
- the above mentioned income tax bands (based on your total earned & unearned income) +17.2% social charges. In this case, you can continue to benefit from the 40% reduction on dividends as well as the capital gains reductions mentioned below. Those earning lower salaries/pensions (below the first band rate of 14%) should generally opt out of the “flat tax” and choose the income tax bands instead.
If opting for income tax bands, capital gains on shares purchased before 01/01/2018 are reduced by 50% if those shares have been held at least 2 years and 60% if held 8 years or more (these reductions also apply to mutual funds that are at least 75% invested in shares). The reduction does not apply to the social taxes. Additional reductions (up to 85%) are available for the sale of shares in small companies under specific circumstances.
Unless total prior year taxable income (revenu fiscal) was under 75k€ (50k€ if single) and a request for exemption is made, 30% tax must be deducted at source on dividends. Similarly, unless prior year taxable income was under 50k€ (25k€ if single) and a request for exemption is made, 30% tax on bank interest & other fixed income must be deducted at source. This is considered to be a “payment on account” and would in fact be reimbursed if you opt out of the flat tax and the resulting total tax based on band rates is lower. All French banks will automatically deduct & declare these amounts for you. For assets abroad, you should declare and pay yourself before the 15th of the month following receipt (unless you fall below the above mentioned limits).
No “prior declaration” or “payment on account” are required for capital gains.
Net losses can be carried forward and offset against future net gains.
Whilst the flat tax brings a welcome tax reduction for financial portfolios, it is still generally recommended to use tax wrappers such as the Assurance Vie - ensuring realised gains and income can roll up inside the wrapper with zero taxation until withdrawn).
FRENCH SOCIAL TAXES
In addition to Income Tax, French residents must also pay CSG, CRDS and Prélèvement de solidarité on worldwide income and gains - relating to both property & financial assets. The standard total rate for social taxes is 17.2%.
Those with rental income from properties outside France should refer carefully to the appropriate dual tax treaty. A number of such treaties (including France-UK) specify that French residents do NOT pay French social taxes on rental income from property situated in the foreign country.
In 2015 it was confirmed at European level (Ruyter, European Court of Justice) that France cannot collect these social taxes from those that depend on the social system of another EU country since these taxes form part of the French social system. The Ministère des Finances then issued instructions on how to make a claim (reclamation) (see here). The government then modified the rules to break the direct link between these social taxes and the French social system - charging social taxes on everyone again as from 1st January 2016. However, this was successfully challenged again in 2018. The Loi de Financement de la Securité Sociale 2019 confirmed that those who belong to a non-French EU or EEA or Swiss social security system are exempt from paying CSG and CRDS on unearned income and gains (as from 1st January 2018).
Unfortunately, due to Brexit, the exemption has come to an end for those dependent on the UK social system (with an S1 form) and unless specific agreement is reached, we assume S1 holders are liable to CSG and CRDS on all unearned income and gains.
Although these are called social taxes, please note they do not give right to any benefits. Please do not confuse with French Social Security contributions. A better term would be "additional income taxes".
For salaries and pensions this is usually deducted at source.
For professionals & personal companies (BNC and BIC) it is collected by the URSSAF along with the standard French social security contributions.
Holding an Assurance Vie has been a method to cumulate interest, dividends and capital gains without any annual taxes until withdrawals are made. The guaranteed funds within the Assurance Vie (known as “Fonds en Euros”) are however subject to French social taxes each year - whether you make withdrawals or not - so it might be preferable to consider holding other types of assets inside the assurance vie instead.
FOREIGN BANK ACCOUNTS
Remember to list all your financial accounts held outside France. This includes current, savings, and investment accounts - as well as foreign life policies.
There’s a box to tick at the end of the annual French income tax return and you must then provide the bank details and account numbers. This information should be given each year for each account used or closed during that year - and you should also make sure you reported at some point in the past any other accounts still open. Remember that this information is being automatically exchanged between the tax authorities of most European countries and being rolled out worldwide.
French fines for non-declaration are substantial:1500€ for each year that the account should have been declared - increasing to 10000€ if the account is held in an offshore country (without a dual tax treaty) such as the Channel Islands or Isle of Man. In some circumstances these fines can even be increased to 5% of the account balance if the latter is over 50000€.
OPTIMISATION : HOW TO REDUCE FRENCH INCOME TAX
1. Know your rights.
For example, there are many allowable costs concerning your principal residence, such as domestic help (nanny, cleaner, gardener, etc), assisting sustainable development (thermal insulation, heating from renewal energy, etc),or making improvements designed for senior citizens. Check the rules and limits carefully first and make sure you keep the invoices.
Make sure you declare the full number of household members. For example, children up to 25 (even if they are not living with you) and dependant relatives can be included under certain conditions.
Payments made to support adult children or aging parents (or invoices for basic living costs paid on their behalf) can also be deductible if they clearly have insufficient income.
Study carefully the documentation you receive with the tax forms and discuss any questions at an early stage with your local tax office.
2. Use schemes with tax incentives
The follow lists some examples of the more interesting schemes available.
Obviously you must never invest in a scheme simply because it saves you taxes!
Ensure that the financial return is appropriate.
Watch out for high commissions and charges ...
The overall limit for tax deductions is 10k€.
European Venture Capital Funds - these qualify if invested in small companies described as Innovative (FCPI) or Regional (FIP).
Given the potential risks, it is important to find experienced fund managers.
These funds may be appropriate if you are looking for longer-term investment and diversification of your financial portfolio..
The eventual gains are exempt from French capital gains taxes.
Private French Pension Funds (PERin, PERP or PERCO)
Although significant pension contributions are deducted automatically from payslips, no-one can be sure how much pension those contributions will provide. Many French residents prefer to ensure a private “top-up” pension scheme that they can manage themselves. Each year, private pension payments - up to 10% of your professional income - can be deducted from your taxable income. For those on 30% upper tax bands this is almost a no-brainer deduction to organise (unless you don’t think you’ll make it to pension age). You should take careful note of the restrictions on access - and ensure you choose a scheme with a good choice of high-quality underlying investment funds.
Film Industry - most people support the French film industry for personal satisfaction rather than financial gains.
Unfortunately you're unlikely to see your name in the credits!
French property - many types of property investment schemes have provided substantial tax reductions - often to the surprise of newcomers to France. If you are interested in rental property - it is worth taking a further look. “Malraux” and “Monument Historique” continue and remain the best methods for reducing tax on high incomes. Standard income-earners may wish to consider investing in new or renovated properties in “difficult” areas under the “Pinel” scheme - especially if you consider the area is undergoing significant improvement - although bear in mind the restrictions on rents and tenant incomes.
If you decide to go ahead with a tax-reducing property investment, it's wise to consider a bank loan since the interest is tax deductible and rates are currently low.
3. Invest in your own French business
Setting up business in France is not as difficult as you may think - several million have been created in France - mostly as small personal companies - and President Macron has simplified and encouraged entrepreneurship further.
Many types of business are however subject to specific regulations. For example, setting up a Gîte or Chambre d'Hôte involves taking account of:
- Competition rules (to protect restaurants and hotels)
- Insurance rules (eg special insurance for swimming pools)
- Property rules (eg safety, hygiene, insulation, ...).
Small companies have a choice between the "micro-entrepreneur", "micro-entreprise" or the "real" system, and professional advice should be taken to determine which is the most advantageous.
4. Special rules for those coming to work in France (Impatriés)
Those recruited to work in France who have not been resident in France for at least the previous five years can usually claim exemption of up to 50% from French taxes for a period of eight years (recently increased from five years to attract high earners from London as a result of Brexit).
This applies to remuneration in France as well as unearned income from abroad.
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