Properties In Europe - French Property, Spanish Property

Taxation of French property

Local Taxes

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 exemption.

Personal Taxes

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.

Income Tax

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):

Income Bracket Tax Rate
Up to €4,191 0%
€4,191 - €8,242 7.05%
€8,242 - €14,506 19.74%
€14,506 - €23,489 29.14%
€23,489 - €38,218 38.54%
€38,218 - €47,131 43.94%
Above €47,131 49.58%

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 France.

Wealth tax

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 year.

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.

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