Saturday, 27 April 2013

An Explanation of the Taxation of UK Rental Income in France

It has been announced by the French Minister of Finance that, at long last, there is to be some clarity and consistency to the tax treatment of UK rental income received by French tax residents.  Whilst clarity and consistency are welcomed, it is likely that for a large portion of the British expatriate community in France, this new approach is going to be costly.

The basic premise operating in most jurisdictions in Europe is that residents of that jurisdiction are taxed on their worldwide income and gains unless this treatment is modified by a Double Tax Agreement .  Thus, if you are a resident of France, you are required by French law to declare your worldwide income and this is subject to French income tax (and the dreaded 15.5% CSG,CRDS etc known to the British community colloquially as “social charges”).

However, certain Articles of the UK/France Double Tax Agreement change the domestic French tax treatment and, under Article 6 of the UK/France Agreement, UK sourced rental income may also be taxed in the UK.  And, indeed, the UK do exercise their right under this Article to tax rental income from UK sited properties.

Relief from double taxation of the rental income, in both the UK by reason of situs and also in France by reason of residence, is obtained by virtue of Article 24 which grants a tax and social charges credit in France equivalent to the French liabilities that would have arisen.  However, this credit is available only “provided that the resident of France is subject to UK tax in respect of such income”.  The debate has been raging since the introduction of the new UK/France Agreement in 2010 as to the interpretation of the words “subject to UK tax”.  Different regions and, indeed, different local tax offices within a region, have been interpreting these key words in very different ways resulting in no taxation on UK rental income for some French resident taxpayers to taxation in full for others who happen to live in a different location in France.  This approach was clearly inequitable.

The Finance Minister’s announcement now provides national guidelines, to be implemented by all tax offices in all regions, that say “subject to UK tax” actually means that the UK rental income must have borne UK income tax.  The Ministry’s view is that the Double Tax Agreement is in place to alleviate double taxation and the French authorities are proclaiming that if no UK tax has been paid, then French tax and social charges are payable on UK rental income because there has been no element of double taxation. This interpretation will mean that there will be thousands of British expatriates facing a French tax and social charges liability on their UK rental income for the first time in respect of 2012 income.

If you are one of the many now in this position, then please contact us as we have been developing some tax planning ideas for our clients who find themselves trapped in this situation.  Please email us at info@petersonsims.com and we will then contact you to discuss your individual situation.