Taxation of French property
There are two local property taxes in France which are both based on
the property's theoretical rental value according to the local land registry,
and is adjusted in line with inflation. The rates of tax will vary from
region to region due to the varying rates of tax imposed by the regional
and local governments.
Habitaion Tax (Taxe d'Habitation)
The occupier of the French property is liable for this tax. It is due
of the 1st January and is payable by the person who was the occupier at
that date. There are exemptions for over 60s and also if the property
is incapable of occupation due to it needing extensive renovation. The
test if whether the property is furnished and whether you can convince
the local mayor.
Funamental Tax (Taxe Foncière)
The owner of a French property is usually liable for this tax, also
known as 'impôt foncier', a land tax which is generally payable
in one lump sum on the 1st January in each year. Unlike the taxe d'habitation,
apportionment can be made between the buyer and seller. If there is an
apportionment this should be stated in the contract for sale. This tax
is even payable on unbuilt land. It may be divided into two parts, one
for the building and some of the land surrounding it, the other for the
remainder of the land. There are exemptions for some agricultural land
and the owners of new property have, at the time of writing, a two year
As a non-resident property owner in France, you may be liable for income tax,
value added tax wealth tax , capital gains tax and inheritance tax. Individual
situations vary considerably and it is best to seek specialist advice from a
tax consultant who has knowledge of the French tax system.
The income derived on property in France should be declared in France.
Once a property is rented out it will become necessary to file a French
tax return (impôt sur le revenu). This Annual Tax Declaration
is mandatory and must give the tax authorities complete information concerning
the taxpayer's identity and their marital and family situation, as well
as the rental value of thier dwellings and/or of their income from French
sources. The forms can be obtained from Centre des Impôts des
Non-Résidents, 9 rue d’Uzès, 75094 PARIS CEDEX 02.
Taxpayers not domiciled in France benefit from special deadlines for filing
this tax return -- for Europe this is 30th of April. Certain allowances
are deductible e.g. interest payable on a local mortgage, repairs and
maintenance, certain real estate taxes, management expenses such as concierge
and security, etc.
French income tax is payable by non-residents at progressive rates with
a minimum of 25%. Rental income should also be declared in the the country
of your dominicile for tax purposes but the French income tax paid in
France is taken into account.
Individuals of French or foreign nationality are considered resident
for tax purposes if their home, principal place of abode, professional
activity or centre of economic interest is located in France, or if they
live in France for more than 180 days per year. As a resident, an individual
is taxed on their worldwide income, subject to applicable tax treaty relief.
Individuals resident outside France are taxed on French-source income
such as income derived from real property. French income tax is levied
at a progressive rate, from 7.05% to a maximum rate of 49.58%. Family
coefficient rules are used to combine the progressive tax rate with the
tax-paying capacity of the household resulting in a lower effective tax
rate. The following table summarises the 2005 income tax brackets and
rates (applicable to 2002 income) for a single individual taxpayer are
(draft Finance Bill, 2005):
|Up to €4,191
|€4,191 - €8,242
|€8,242 - €14,506
|€14,506 - €23,489
|€23,489 - €38,218
|€38,218 - €47,131
Even if you do not let your French property, there is the possibility
that the French tax authorities may seek to charge you income tax on 3
times the national income from the property if you are a tax resident
of a country which has not entered into a double taxation treaty with
A wealth tax (impôt de solidarité sur la fortune)
is levied in France each year on individuals with a total net wealth exceeding
€720,000. For non-residents, wealth is assessed on the basis of their
assets situated in France. Their value is based on the fair market value
of the assets in France as of 1st January of each year. Tax is assessed
on the net wealth according to a progressive rate from 0.55% to 1.8% (above
€15 million). Business assets are exempted from wealth tax. Therefore,
you are only liable for wealth tax if the total of your savings and French
property is worth more than €720,000.
Capital Gains Tax
Capital gains derived from the disposal of shares and real property are
subject to tax. French tax residents are subject to tax on gains realised
worldwide (subject to applicable tax treaty relief). Subject to the provisions
of these tax treaties, non-residents are subject to tax in France on sales
of a substantial shareholding (over 25%), or of real property or of shares
in real property companies situated in France.
Capital gains realised on the disposal of shares are taxable at a rate
of 26%. The actual capital gains tax is 16% increased by an additional
social contribution, amounting in total to 10% for 2002-2005. Capital
gains are taxed if the annual amount of disposals exceeds €7,650
per taxable household.
Gains derived from the sale of real property
or shares in real property companies are included
in the taxable amount and are subject to the progressive
rate of personal income tax. Capital gains realised
on the sale of real property held for more than
two years benefit from more favourable treatment
and capital gains. Sales of a principal private
residence or, under certain conditions, of a second
home, benefit from a complete exemption. Therefore,
if you sell a property property which is not your
primary residence within two years you are liable
for income tax, rather than capital gains tax.
If you sell a property which is not your primary
residence after two years, then an inflationary
allowance of 5% per year is taken into consideration
when calculating the capital gains tax you are
liable to pay. You are totally exempt to pay capital
gains tax on an asset if the disposed asset is
held for 22 years or more (i.e. 2 years with no
inflationaery allowance plus 20 years at 5% per
year inflationary allowance, yeilds 100% allowance).
Generally, Capital Gains Tax is payable by second or holiday home owners
when the property is sold unless you have owned the property for 22 years
or longer. Calculating whether there has been a capital gain involves
deducting the purchase price plus 10% from the sale proceeds, less agents
commission and legal costs. It is also possible to deduct the costs of
renovating your French property provided you have kept proper receipts
which must include VAT. The longer you have owned your French property
the less you pay until you reach 22 years where it dwindles to nil. Try
not to sell in under 2 years as you will not be allowed to claim any of
the special allowances. There are exceptions such as pressing family reasons
- e.g.death. If your French property becomes your permanent home CGT will
not be payable after 5 years of residence for at least 8 months in each
Under the double tax treaty with France, if you are tax resident in a
country that has entered into such an agreement with France, the agreement
allows you to credit any capital gains tax paid in France against any
capital gains tax payable in your tax domiciled country.
Inheritance Law and Taxation
If you buy a property in France, your ability to give it away or to
leave it by Will is governed by French Law. This gives your legal heirs
entrenched rights to a certain proportion of your French estate. This
proportion is known as the 'Réserve Légale'. It is only
the remainder, the 'Quota Disponible' that you can freely give away by
a lifetime gift or a Will. To explain this complex situation it is probably
best to give an example. Say, you are survived by one child : in that
case, you can not give away any more than half your French estate either
during your lifetime or by Will. If you are survived by 2 children then
this limit is reduced to one third and to one quarter if you are survived
by 3 or more children. Should you have no children then other members
of your family may qualify as legal heirs and enjoy entrenched rights
to a proportion of the estate. You cannot vary the share of your French
estate which each of your legal heirs are entitled to but you can specify
out of which parts of the estate your legal heirs can take their shares.
A husband or wife are not legal heirs of each other and have no rights
to the legal reserves. French law, does however, allow you to make certain
disposals for your spouse which go beyond what he/she would be entitled
to if he/she were a mere stranger.
A lifetime gift of your French home or an interest in it will attract
gifts tax (droits de donation) similarly, on your death your
French estate will attract succession tax (droits de succession).
After various allowances, which are decreasingly generous from spouses
to children, the tax is charged in a series of bands which are at the
time of writing 5% for spouses. Children and parents rising to 40% on
large assets, 35% for brothers and sisters rising to 45%. It is a complex
subject and specialist advice should be sought.
One way of avoiding the effects of French Inheritance law is to set up a company
for the purpose of buying the property. Such companies are called 'sociétés
civiles immobilières' or SCI. If you own shares in an SCI, which owns
the property, you can dispose of them in accordance with the law where you are
domiciled. This will not lead to the avoidance by your heirs of inheritance
tax it merely means that you will be able to dispose of the property as you
see fit. An SCI is quite expensive to set up and expert advice should be sought
before doing so.
Another way is to buy the property jointly or 'en tontine'. It is however
a complex process which is extremely difficult to unscramble once set
up. It quite simply means that on the death of one partner the property
passes to the survivor. Whilst it mitigates the effects of French inheritance
law it does not mean that inheritance tax can be avoided.