If you are about to sell your French home but have lived in France without being properly registered under the French tax system, you risk being refused the principal private residence exemption. Indeed without the up-to-date filing of your French income tax returns declaring your worldwide income, you will not be registered under the French system and the authorities will simply tax the net gains as if you were resident outside France at rates of 16% or 33.3%.

Cases handled over the last few months have shown that attempts to bring the situation up to date before the sale may be fruitless if the first stages of the sale have taken place (the signing of a compromis de vente, for instance). Nevertheless, if a person is exposed to double standards in terms of taxation that is to say treated as a resident for income tax purposes and as non residents for capital gains tax purposes, they should be able to claim against one or the other form of tax (depending on the evidence available). As this type of case is likely to go before the cour administrative, which is a lengthy and costly process, anyone susceptible to find themselves in this situation is strongly advised to regularise their situation as soon as possible.

In France the onus is on the taxpayers to obtain and file their tax return. Once the first return has been filed the person is duly registered and should receive a pre-identified tax return every year. Unfortunately, it appears that a great deal of well-meaning expatriates have been wrongly advised by none other than their local tax offices. Some even seem to state that the receipt of foreign source income simply dispenses the recipient from filing a resident tax return. This is simply not true.

Changes to the France-UK double tax treaty

The Département de la Législation Fiscale has been working on a new France-UK Double Tax Treaty (DTT) since the early nineties. The new agreement was signed on 28 January 2004 but will not enter into force before it is fully ratified. This may take up to 1 January 2005 or 2006. Below are the main changes, which will interest British citizens living in France.

Scope of the DTT: The Contribution Sociale Généralisée and Contribution au Remboursement de la Dette Sociale as well as the additional taxes to French corporation tax are clearly included in the scope of the agreement.

The term “resident of a contracting state” where that State is France, now expressly includes partnerships or other groups of persons which are not liable to French corporation tax such as sociétés civiles, groupements d’intérêt économique, groupements d’intérêt public, groupement agricoles or forestiers, which have their seat of effective management in France.

Rental income: The article dealing with income from “immovable property” now specifically includes shares or other rights in a company or other legal person, partnership, trust or any similar body, which give an entitlement to enjoy immovable property situated in a contracting state. The latter is allowed to tax such income under the terms of the DTT, subject to the terms of the specific articles dealing with business profits and independent personal services.

The articles concerning the payment of dividends, interest or royalties and other income now include a general clause of nullity against any abusive use of the rules they establish, i.e. if it was the main purposes or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights/debt-claim/right or property in respect of which the dividend/interest/royalties is paid to take advantage of the Article by means of this creation or assignment.

Capital gains on the sale of real estate: If the underlying assets of trusts and partnerships consist principally of immovable property, the gain arising from the disposal of any interest in such entities may be taxed in the country in which the real estate is situated.

Capital Gains Tax realised on UK properties by a resident of France: The current treaty contains a loophole which leads to the double exemption of any gains arising on the sale of a UK property in the hands of individuals with a non-UK resident and not ordinarily resident status provided that the taxpayer does not move back to the UK within 5 years of leaving. This loophole will cease under the new treaty through a clause, which states that in the case of France, France may tax the gain and double taxation in respect of gains arising from the disposal of UK real estate. Any double taxation will be eliminated by a tax credit equal to the amount of tax paid in the UK on that gain. As there is no UK liability in this context, there will be no tax credit against the French tax liability. This means that from the date the new treaty enters into force, any gain realised on the sale of a UK property by a resident of France will be assessed and taxed according to the French capital gains tax rules.

Wealth tax: Residents of France for tax purposes are exposed to French wealth tax on the net value of their worldwide assets, including the value of any real estate or rights in real estate outside France. The new agreement would exclude non-French properties from the wealth tax computation for five years following the permanent move to France. This would only concern UK nationals who are not also French nationals. If the taxpayers leaves France and provided they remain outside France for at least three years, the five-year exemption applicable to non-French situ assets would apply once more.