The clocks have gone forward, Spring has arrived, which means it is time to start thinking about your French tax returns! Some things in France seem to involve an inordinate amount of paperwork, but for many, tax is not one of those, as the process is surprisingly straightforward, or at least it may seem that way with the right professional guidance.
Firstly – let’s be clear about who has to do them. Anyone who is tax-resident in France (if you are in any doubt about your tax residency status, see our blog on residency). A French resident must complete a declaration for income tax “Impôt sur Revenue“– even if you have no income at all, you still have to complete a return, even if it contains just your address. A very important point for those who are new to France; it is not up to the fiscal authorities to find you and send you a form – it is your obligation to get a return and submit it.
The declaration for Wealth Tax (Impôt de Solidarité sur la Fortune) must be completed by
- – French Tax residents who have total worldwide assets of more than €790,000
- – Non French Tax residents who have total assets in France of greater than €790,000
The tax is assessed on the value of your assets as of the 1st January. Note that assets in this case are net assets – i.e. any liabilities such as mortgage or other loans can be offset against assets, as can your taxes, including your theoretical wealth tax bill!
Again, it is entirely your responsibility to make sure you submit a return if you need to.
The main French income tax Forms
The 2042 – the main income tax declaration
The 2042c – the complementary form for extra information
The 2047 – the declaration for income from abroad
The 2044 – the declaration for income from property
Bank Accounts outside France
As a foreigner, it is likely that you have bank accounts outside of France. It is very important that you offer details of these accounts with your return. This is asked for in box UU of the 2042. This can be achieved by filling in a 3916 for each account, or you can simply detail all your accounts on a separate sheet of paper.
If you fail to do this you may be fined €750 PER ACCOUNT not reported, so if you have several accounts this may become an expensive omission.
This was a real sticking point for many people last year. As always, there is the law (use of the Paris exchange rate at the day of exchange) and then there is what the local tax office wishes you to do which, bizarrely, do not always coincide. This is because the law means looking up each payment of income over a year, which is fine for your French person with minimal foreign income, but overly complex for foreigners who derive all their income from abroad; too much work for you and, more importantly, too much work for the tax office.
The most common suggestion we have come across from local tax offices, is to use the 31st December rate, which for 2009 was €1.125999324 (to be precise). Last year we saw up to 8 different methods being suggested by local tax offices all over France. This has led many to find a way to get it in writing from a suitable source. A word of assurance, I have never seen anyone penalised for using a reasonable exchange rate, in good faith, so don’t lose sleep over it.
People often ask us how to reduce their taxes at tax return time, which brings to mind a rather old joke. A man was walking in the countryside, trying to find his way to Paris. He came across an old shepherd, minding his flock of sheep. He approached the man, and asked him “could you help me find my way to Paris?”. The shepherd looked at him with a puzzled expression, and after a long pause replied “Well I wouldn’t start from here if I were you”.
This is a roundabout way of saying that much effective tax planning has to take place well before you fill in your returns. This is where Kentingtons can help, by using strategies that reduce the amount of declarable income, which in turn can reduce your income tax, social charges, capital gains tax and wealth tax (more on this later). However, if you haven’t taken steps to minimise liabilities, it is never too late – if nothing else, we may be able to help next year!
The main points to consider for the income tax return itself are to ensure that you are not over-declaring income, and are claiming for all possible reliefs you are entitled to. For example, make sure you understand whether any interest you have received has already had tax deducted. If this income is by a foreign authority (e.g. the UK), you may be able to reclaim it from them. If you let out property, there are deductions you can make for the costs – although this is quite complex, as there are several ways of doing this. On the relief side of things, certain home improvements that are “ecological” – double glazing, heat pumps, solar panels etc, can entitle you to tax relief. Using the “parts” system correctly can also reduce your tax bill – you are taxed as a household in France, not as an individual like the UK system, but your tax bill will be lowered depending on the number of people in your household – and here, spouses, dependent children in full time education, and even elderly relatives can all count. Treatment of overseas pensions can be complex, and it is worth seeking some advice to make sure you are dealing with this correctly.
If you are (un)fortunate enough to be liable for Wealth Tax, then there are two very important reliefs that you need to be aware of, the “Plafonnement“, and the “Bouclier Fiscal“. Basically, if your taxable income is low, you may be able to significantly reduce your Wealth Tax, or possibly eliminate it altogether!
The “Plafonnement” – This is specific to wealth tax and this calculation is found on the tax declaration itself, offering an immediate reduction of your tax bill. Basically, this rule means that your wealth tax cannot be more than 85% of your taxable income, though if your assets are above €2,530,000, the reduction can only be 50%.
The “Bouclier fiscal” – This is not specific to wealth tax, but also other taxes. This rule means that your total tax bill – including income tax, local taxes on your main residence (“Habitation” and “Foncière“) and Wealth Tax should not be more than half of your taxable income. So if you have a lot of assets, but have a low income (or can arrange for your income to be low – hence the need to plan!) then this can be highly effective.
Of course, there is not enough space to regurgitate the whole fiscal code here – the above are general principles only – each case is different. Like in any jurisdiction, there are a multitude of rules, regulations and special cases, and being France, they are often less than intuitive to the Anglo-Saxon mind. However, to make the most of your money, you need to start thinking like a French man or woman, at least fiscally!
Kentingtons are qualified Tax and Financial Advisers in France, and so if you are unsure if you are making the most of your money here in France, then please contact us, and we will be happy to see if there is anything we can do to help. Initial consultations are completely free.