Considering the time of year, I was recently given the opportunity to discuss tax declarations, for the Connexion. Typically, I would politely decline such offers as my expertise lies in providing counsel rather than tax administration. While French accountants can assist with tax administration by calculating the bill and guiding you on how to declare it, they often overlook the crucial aspect of financial and tax planning, which is essential for a comprehensive approach.
However, I couldn’t resist making an exception this year. The truth is, tax declarations have evolved into a labyrinth of complexity, and we’ve witnessed some very costly blunders and errors being made in French tax returns.
What’s particularly alarming is that these mistakes seem to rear their heads when it comes to investments—a domain that happens to be one of my specialities.
During a recent conversation, I came across an individual who shared their tax declaration approach with unwavering confidence. However, to my dismay, their methods were alarmingly inaccurate, bordering on dangerous. This encounter left me wondering how many people out there could truly benefit from a gentle nudge away from going in the same direction.
So, let me make it clear that what follows is not a conventional declaration guide. Instead, consider it a compass pointing you away from the pitfalls and mistakes you must avoid at all costs. It’s high time we shed light on the “what not to do” aspects of tax declarations, especially for expats seeking invaluable financial advice in the French territory.
Do not declare investment withdrawals as income
I understand the confusion that can arise in this matter. Many individuals receive pension income through “drawdown” arrangements, such as a UK SIPP (Self-Invested Personal Pension). However, it’s important to recognise that this represents a pool of invested funds, and any withdrawals made should not be classified as regular income. Instead, they must be declared as pension income, following the applicable regulations.
Now, even if your investment structure lacks the tax-friendly features of a pension, there’s still good news. In such cases, only the gains or income generated need to be reported. For instance, if you hold an assurance vie, which comes with additional tax advantages, not all of the earnings will be subject to declaration. A significant portion of that income is considered a return of capital, meaning it’s not assessable for taxation purposes.
When the time comes, your investment provider will provide you with the necessary information, outlining the assessable figure that requires declaration—typically arriving around the months of March or April. It’s essential to stay informed and ensure compliance with the correct reporting guidelines to make the most your financial situation while living as an expat in France.
Make sure that you do not pay social charges twice
Since the advent of the fixed rates of tax under PFU (prélèvement forfaitaire unique), we now have a standardised approach with default rates. These rates encompass 12.8% for tax and an additional 17.2% for social charges, resulting in a total of 30%. It may seem straightforward, but here’s where the problems begin: Many individuals mistakenly include their investment income in their tax declaration without realising that social charges have already been paid at the source. Consequently, they unwittingly find themselves subject to a second round of social charges through the declaration process.
Now, imagine compounding this with the previous one we discussed. If you’re making both of these mistakes, brace yourself for a shockingly high tax bill. Your hard-earned money could end up being eaten up by taxes far beyond what it should be.
As a seasoned financial advisor in France who is well versed in navigating the complexities of the French tax system, my goal is to help you steer clear of such pitfalls. Stay vigilant, understand the intricacies, and ensure that you don’t fall victim to unnecessary double taxation.
Obtaining reduced social charges if not under the care of the French social system
Since 2019, individuals under the care of another state or those not covered by the French healthcare system may find themselves exempt from paying both the CSG and the CRDS. When it comes to investment income, this exemption amounts to 9.2% and 0.5% respectfully.
Now, let’s look into this further. This means the social charges are reduced to a more manageable 7.5%, with only the prélèvement de solidarité to be paid. However, the application of these rules can be perplexing, leading to what I can only describe as a “messy” situation. Certain financial institutions accept evidence of non-inclusion in the French healthcare system, thereby applying the 7.5% rate. However, others take the conservative approach of applying the 17.2% rate as PFO (prélèvement forfaitaire obligatoire), suggesting that you reclaim the excess from the tax office. It’s worth noting that for lower taxable amounts, pursuing a claim may not be worth the effort. Nonetheless, understanding the potential loss involved can help you make an informed decision.
Allow me to share a recent experience with one of my clients who was understandably anxious about their claim. After investing a significant amount of time and effort, I had the pleasure of informing them that out of their €10,000 withdrawal, only €800 was assessable, and the additional 9.7% amounted to a mere €77.60 (they visibly relaxed). Clearly, when it comes to substantial withdrawals, particularly if they are not within a French tax-friendly structure, the exemption claim becomes essential.
So, I urge you to consider the implications and explore the options available. Don’t let the complexities deter you from potentially significant savings.
Not declaring foreign accounts
Whether you’ve been living in France for a while or are a relatively new arrival, this is an important piece of information that many individuals learn the hard (and expensive) way. It is a legal obligation to declare all accounts, regardless of their nature, and life assurance investments held abroad each year. Failure to do so comes with severe consequences, including a financial penalty of €1,500 per account/policy for each year that goes unreported to the French tax authorities. Brace yourself, as the penalty soars to a staggering €10,000 if the account is situated in a country without an information sharing agreement with France. A few years ago we had someone who contacted us, having unintentionally failed to declare sixteen accounts in the UK—ouch!
In light of these potential pitfalls, the best solutions is to keep the number of accounts held abroad to a minimum. This approach will not only streamline the administrative processes (imagine completing the 3916 forms, sixteen times for someone with sixteen accounts), but it also mitigates the risk of incurring substantial financial penalties. It’s all about minimising complications and safeguarding your financial well-being while navigating the French tax landscape as an expat.
Remember, ignorance of the law is not an excuse, and the consequences can be financially devastating. Stay informed, streamline your accounts, and protect yourself from unnecessary penalties.
Final thoughts about these common french tax return mistakes
To wrap up, the issues discussed here represent just the tip of the iceberg. There are numerous other considerations that arise when dealing with taxes and finances in France. If you’re a newcomer to the country, it is highly recommended to enlist the services of a French accountant to handle your initial tax declaration. Their expertise can save you from potential pitfalls and ensure a smooth transition. Even if you’ve been managing your declarations independently for some time, it’s still worth consulting with a professional to verify that you’re not overpaying or missing out on any opportunities for optimization.
Generally, you can go back and claim deductions or corrections for up to the past three years. This means that the potential benefits of engaging an accountant can often outweigh their fees. You might discover significant claims that could have a positive impact on your financial situation.
As an expat living in France, it’s important to be proactive and seek the assistance of qualified professionals who can guide you through the intricate French tax landscape. Don’t underestimate the value of expert advice and the potential savings it can bring. Secure your financial future by tapping into the expertise of professionals who can help you navigate the complexities and maximize your financial well-being.
