The EU Savings Directive (2003/48/EC) requires European financial institutions to provide details of income arising from investments held with them to the fiscal authorities of the EU state in which the owner of the income is resident. Until quite recently, little appears to have been done with this information – especially when only relatively small amounts had been involved – but Tax Offices all over France have been mounting a dogged campaign to track down and impose tax and prélèvements sociaux on income and gains which the owner has failed to include on their annual French déclaration for 2011.
Residents of France must declare their worldwide income and gains on their annual déclaration even if the income is ultimately exempt from tax in France by virtue of a Double Tax Agreement, for example, Government Service pensions. Many expatriates mistakenly believe that certain financial products which were tax efficient in the UK, for example ISAs, are exempt from taxation in France, just as they are in the UK. This is leading to a field-day for the local Tax Offices once they have received notification under the EU Savings Directive that a French resident has income or gains from overseas sources and has failed to declare it on their French déclaration.
We are seeing an marked increase in tax return audits or “controles” being instigated on 2011 déclarations . These are often as a result of undeclared income or capital gains relating to an ISA or some long forgotten bank account. Most individuals, when caught up in a controle, are resigned to accepting that they had made a mistake, usually through ignorance, and sit back to await the bill from the tax office. However, for those individuals who have sold or encashed unit trusts or similar investments, a far bigger headache awaits.
Under the EU Savings Directive, the financial institution has to report the total proceeds paid to the individual upon sale or encashment– and this is where the trouble starts. The Tax Offices receive notification of « Montant total des revenues réalisée lors de la cession, rachat ou de remboursement…. xxx€« and, unfortunately, the immediate reaction is to treat this sum in its entirety as taxable income.
For the vast majority of individuals, their units within a unit trust will have been purchased with an original investment and, possibly, dividends which were reinvested over a number of years to buy further units, so there is a cost base associated with the investment. Put simply, a taxable capital gain is calculated by deducting the cost of purchasing an asset from the eventual sale proceeds. Unfortunately, the French Tax Offices are seizing on the amount declared under the EU Savings Directive and not factoring in any original or addition cost for the investment. The result is a large and unjustified tax bill!
When the Tax Offices are under pressure to garner every last centime, the incidence of controles are going to multiply so it is better to get your house in order now and make sure income and gains from overseas sources, eg the UK, are reported correctly on your annual French déclaration and you will then substantially reduce the risk of a controle because your figures will broadly match those supplied to the Tax Office under the EU Savings Directive.
If you are currently caught up in an audit, require further advice on the issue of undeclared income for earlier years or help with your next declaration, then please contact: