As residents of France, you are obliged to declare all of your worldwide income and capital gains for tax in France. The tax year is the calendar year and there is no PAYE in France, so all income must be included in your annual tax return.
The tax declaration for 2011 income is to be submitted by the end of May 2012. Those making their first declaration will have to obtain the forms from their local tax office.
All income declared will be subject to income tax (“impôt sur le revenu”) and “social taxes” (“contributions sociales”). The latter is an extra tax on most sources of income, which is used to finance the health and other services, and is a set percentage of what you declare.
On the other hand, income tax is on a banded system and involves a complicated calculation. This is because different allowances are given for different types of income. For instance, pension income is only taxed on 90% of its value, up to certain limits. Unlike the UK, you are taxed as a “household”, rather than as individuals, with each member of the “household” considered to earn part of the income, irrespective of its origin.
How many declarations to make.
A married couple, or a couple who have formalised their relationship through a “PACS” (“Pacte Civile de Solidarité”) will make one declaration. The combined income will be considered to be earned equally by each spouse.
Unmarried couples with no PACS should each make separate declarations.
Dependent children will be included in their parents’ tax return and will also be considered to earn part of the household income.
Married couple: 1 part each
The first two children: 1/2 part each
Third and subsequent children: 1 part each
This system obviously favours large households, but also reduces the tax burden where one partner earns the majority of the income.
What to declare?
As a French resident, you should declare all of your worldwide income and gains on your French tax return. If you pay income tax outside France (say in the UK) on the same income, the Double Tax Treaty prevents you from paying tax twice.
In fact, as non-residents of the UK, you should only be paying UK tax on UK earned income, UK public sector pensions and UK property income. These are not taxed in France, but are included in the calculation to work out your tax band for any other income. If you are paying UK tax on any other income, you will need to complete form “France Individual”, available on the Inland Revenue website, to apply to have income paid gross and recover any tax paid.
However what is tax-free in the UK is not tax-free in France. Interest, dividends or gains from PEPs/ ISAs, for example, need to be declared for tax in France.
A new rule in 2012 involves the declaration of all assets held in Trust, where the trust has a French resident settlor or beneficiary, as if the assets belonged to that person.
What exchange rate to use?
We are often asked at this time of year, and have had varying responses from different tax departments over the years.
In theory, you should keep track of the exchange rates applicable to your Sterling income as you received it! However, for regular payments received over the year, the authorities are happy for you to use the average rate for the year. It is our understanding that, for 2011, this was £1= €1.1483. For a large one off payment, the exchange rate on the date of receipt should be used.
Overall, income tax is relatively reasonable in France, since although the top rate is 41%, only 50% of households in France pay any income tax at all!
It tends to be a large amount of bank interest or investment income, which makes the largest difference to your tax bills and, with proper planning, it is relatively easy in France to shelter investment income from income tax
Jennie Poate is Regional Manager of Siddalls France, Independent Financial Advisers specialising in tax, inheritance, investment and pension planning, for the British community in France since 1996. www.siddalls.fr or e-mail email@example.com