Who Is Liable For Income Taxes in France
Individual income taxation is based on residence. Taxpayers are categorized as residents or nonresidents. Treaty rules on tax residence override domestic rules.
Residents. Persons of French or foreign nationality are considered residents for tax purposes if their home, principal place of abode, professional activity or center of economic interest is located in France. As a resident, an individual is taxed on worldwide income, subject to applicable treaty exemptions.
Nonresidents. Persons not considered resident as defined above are taxed on French-source income only.
Expatriate tax law. A favorable expatriate tax law applies to employees seconded to France after 1 January 2004. This favorable tax regime (Article 81 B of the French tax code) provides that under certain conditions, expatriates seconded to France after 1 January 2004 may not be taxed on compensation items relating to the assignment in France, such as a cost-of-living allowance, housing cost reimbursement and tax equalization payments. The main condition is that the taxpayer must not have been considered a tax resident of France in any of the five tax years preceding his or her year of arrival in France. In addition, up to 20% of the remaining taxable compensation can potentially be excluded if the expatriate performs services outside of France during his or her assignment (non-French workdays). The exemptions are available until 31 December of the fifth year following the year of transfer to France. Administrative regulations on the law, which were released in 2005, provide that the exemptions in the law may not be combined with the benefits under the French headquarters rules (see Expatriate French headquarters and distribution center employees).
Effective from 1 January 2008, the favorable tax regime described above (now Article 155 B) has been extended to local hires (including French nationals) who relocate to France and meet the above residency criteria. Taxpayers who satisfy the Article 155 B conditions benefit from a 50% tax exemption with respect to their foreign-source dividends, interest, royalties and capital gains (resulting from sale of securities) for a period of five years (subject to certain conditions concerning the source of such income). Social surtaxes of 12.3% remain payable on the full income.
Expatriate French headquarters and distribution center employees. A foreign expatriate assigned to the French headquarters (HQ) of a multinational company may be eligible under a HQ ruling for tax relief for up to six years from the assignment date. The principal advantage of a HQ ruling is the elimination of tax-on-tax if the employer reimburses an expatriate for his or her excess foreign tax liability. This tax reimbursement is taxed only at the corporate rates and is not grossed up. With careful planning, exemption from personal income tax on many benefits and allowances may be obtained. The new expatriate tax law is generally more favorable than the HQ rules and an election must be made as to which of the two regimes applies to the expatriates of a HQ.
Taxable income. Taxable income consists of annual disposable income from all sources. Income is identified based on its nature, and then allowances, deductions and treaty provisions are applied in calculating net taxable income subject to progressive tax rates.
The taxation of each category of income may be modified by an applicable treaty provision. For example, U.S. citizens are not taxed on U.S.-source passive income (however, see Effective rate rule).
Taxable salary income. The total of all compensation paid by an employer is considered taxable salary income and includes such items as the private-use element of a company car, employer-paid meals and employer-paid education expenses for employees and their dependent children. Taxable compensation does not include the following items paid by employers: certain pension contributions, certain medical insurance premiums and, for resident foreigners and nonresidents, home-leave expenses, moving expenses and temporary housing expenses.
Self-employment and business income. Self-employment income is divided into the following three categories, depending on the nature of the activities: commercial (includes trades), professional and agricultural.
Taxable income realized from each category is subject to the progressive tax rates that apply to resident individuals. In addition, a self-employed individual is subject to a flat social tax (see CSG/CRDS and social tax).
Self-employed individuals involved in commercial activities are required to use the accrual method of accounting and must include in taxable income all receipts, advances, expense reimbursements and interest directly related to the activities. Long-term capital gains from disposals of a company’s assets benefit from a special measure, which provides for gains to be taxed at a rate of 16%, with an additional 12.3% (8.7% for contribution sociale généralisée [CSG]/contribution reimboursement de la dette sociale[CRDS] and 3.6% additional social tax) charged on passive income and capital gains.
Taxable income for professional activities is equal to the difference between receipts and expenses actually received or paid in the calendar year. This use of the cash-basis method of accounting (though optional) constitutes the principal difference between the taxation of commercial and professional activities. Detailed daily records must be maintained by self-employed persons. Long-term capital gains from disposals of assets used in professional activities are taxable at a rate of 16%, with an additional 12.3% for CSG/CRDS and additional social tax charged on passive income and capital gains.
Profits derived from agricultural cultivation and breeding constitute taxable income, which is determined by using the cash method of accounting. Because of the variability of farm income, special tax rules apply. In general, long-term gains from disposals of assets used in agricultural activities are taxable at a rate of 16%, with additional social taxes of 12.3%. However, specific rules apply in certain cases.
Directors’ fees. Under French internal law, directors’ fees are treated as dividend income. Similarly, because directors’ fees are not considered salary, the 10% standard deduction does not apply. Directors’ fees paid to nonresidents are subject to a flat 25% withholding tax, unless a tax treaty provision reduces or eliminates the tax.
Investment income. Interest and dividends are taxed at ordinary income rates. Qualifying dividends can benefit from the “demi-base régime” (that is, a 40% deduction for 2010; however, see Exempt income). For a married couple, the first €3,050 of total taxable dividend income is exempt. The exempt amount is €1,525 for single individuals. See Expatriate tax law for information regarding taxpayers qualifying under Article 155B.
Net income derived from the rental of real estate and from royalty income (other than for industrial property) is taxed as ordinary income. Royalties from industrial property are taxed at a 16% rate plus 12.3% CSG/CRDS and social tax for a total of 28.3%.
Exempt income. Exempt income includes the following:
- Certain profits from the sale of securities.
- Family allowances and health care reimbursements.
- Interest from qualified savings accounts and interest and dividends on which an optional tax has been paid, usually at a rate of 19%, 35% or 45%, depending on the type of interest or dividend. Dividends on which a taxpayer has elected to pay a flat rate optional tax are not eligible for the “adjustable taxable base regime” (“demi-base régime”) nor the annual exemption referred to above.
- Payments received pursuant to life insurance contracts (under certain conditions).
Employment income earned by a tax resident of France with respect to employment duties performed outside France for an employer established in France, a European Union (EU) member state or a member state of the European Economic Area (EEA) that has concluded with France a tax treaty containing an administrative cooperation clause is exempt if one of the following conditions is satisfied:
- For more than 120 days during a 12-month period, the employee is engaged outside France in prospecting for new clients for his or her employer.
- The employee establishes that his or her salary is subject to a foreign income tax equal to at least two-thirds of the equivalent French tax.
- For more than 183 days in a 12-month period, the employee performs employment duties overseas in connection with construction, engineering, or exploration or extraction of a natural resource.
Supplemental amounts, contractual bonuses or per diems earned for foreign duty by such residents may be exempt from tax under certain conditions, depending on the number of foreign workdays. This exemption is limited to a maximum of 40% of the remuneration. Special exemptions and rules apply for small businesses engaged in commercial, professional and agricultural activities and in certain other circumstances.
Taxation of employer-provided stock options. Exercise gains realized on stock options from nonqualified plans or on sales that occur outside the required holding period for qualified plans are subject to full ordinary income tax and employee and employer social security contributions.
Stock option plans that qualify under French corporate law benefit from a favorable tax regime. Foreign plans may be amended to qualify under the French rules. No taxes or social security contributions are levied at the time the option is granted. At the time of exercise, taxes and social security contributions are not levied unless the option exercise price is less than 95% of the average stock price over the 20 trading days preceding the grant date.
For options granted on or after 16 October 2007 under a French qualified plan, a new employer contribution is due on grant. This contribution equals 14% (rate applicable for options granted on or after 1 January 2011) of the fair market value (FMV) of the option as determined for accounting purposes (International Financial Reporting Standard [IFRS] 2) or 14% of 25% of the value of the shares underlying the options. Employees are also subject to an additional contribution at the date of sale of the shares acquired through the exercise of an option. This contribution applies to options granted on or after 16 October 2007 and equals 2.5% or 8% of the exercise gain (difference between the FMV of the shares on exercise and the amount paid to exercise the options). The 2.5% rate applies if the value of the exercise gain realized by the beneficiary during the tax year does not exceed €17,676 (amount for 2011).
When stock acquired under a qualified plan is sold, the gains benefit from favorable tax treatment if all of the following requirements are met:
- The shares are kept in nominative form.
- The employee observes a holding period of at least five years running from the date of grant to the date of sale of the shares acquired through the exercise of the option (four years for options granted on or after 27 April 2000).
- The employer and the employee satisfy specific reporting requirements at the time of exercise of the option and the sale of the underlying stock.
If these requirements are met, the entire gain (that is, the sale price less the strike price) derived from the sale of stock acquired under options granted before 20 September 1995 is taxed at a flat rate of 31.3%, including the flat social tax (see CSG/CRDS and social tax). Gains derived from the sale of stock acquired under options granted after 20 September 1995 and before 27 April 2000 are taxed in accordance with the following rules:
- The difference between the fair market value of the stock at the exercise date and the strike price is subject to tax at a rate of 42.1% (including CSG/CRDS and social tax). However, the employee may elect to have this amount taxed as employment income if this treatment is more advantageous.
- The difference between the sales price of the stock and the fair market value of the stock at the date the option was exercised is taxed as a capital gain at a rate of 31.3% (including CSG/CRDS and social tax). Gains derived from the sale of stock acquired under options granted on or after 27 April 2000 are taxed in accordance with the following rules:
- If the four-year holding period is met but the stock has not been held for at least two additional years, the spread (the difference between the fair market value of the stock at exercise and the strike price) is subject to tax at a 42.3% flat rate (including CSG/CRDS and social tax) on the amount of the spread up to €152,500, and at a 52.3% flat rate (including CSG/CRDS and social tax) on the excess.
- If the four-year holding period and the additional two-year holding period is met (that is, at least six years have passed between the grant date of the option and date of sale of the stock acquired through the exercise of the option, including a stock holding period of at least two years), the spread is subject to tax at a 31.3% flat rate (including CSG/CRDS and social tax) on the amount of the spread up to €152,500, and at a 42.3% flat rate (including CSG/CRDS and social tax) on the excess.
Alternatively, the employee may elect to have the exercise gain taxed at the regular progressive tax rates and a 12.3% rate (including CSG/CRDS and social tax), if this is more advantageous.
As discussed above, for options granted on or after 16 October 2007, an additional employee social contribution of 2.5% or 8% must be paid.
If the stock is sold before the end of the applicable holding period, the difference between the fair market value of the stock at the date of the exercise and the option price is taxable as regular employment income at progressive rates. In addition, employer and employee social security contributions are due with respect to the exercise gain (except in certain very specific situations).
Taxation of restricted stock awards. Restricted stock awards are now subject to favorable tax and social security treatment. To qualify, the company’s plan must meet specific rules. In addition, the law requires a minimum vesting period of two years from the date of grant plus an additional minimum holding period of two years for the shares received. If the vesting and holding period conditions are satisfied, the income tax charge is deferred until the date of the sale of the shares and no social security tax is due with respect to the value of the stock award.
For awards made on or after 16 October 2007 under a French qualified plan, an employer contribution is due at the date of the award. This contribution equals 14% (rate applicable to options granted on or after 1 January 2011) of the FMV of the shares awarded as determined for accounting purposes (IFRS 2) or 14% of the value of the shares on the date of the award.
However, if the annual FMV of the shares awarded as determined for accounting purposes (IFRS 2) or the annual value of the shares on the date of the award (determined per each beneficiary) does not exceed 50% of the annual social security ceiling (€17,676 for 2011 income; that is, 50% of €35,352), the employer contribution is levied at a rate of 10%.
Employees are subject to an additional contribution of 8% of the FMV of the shares on the date of delivery. However, if the annual acquisition gain realized in connection with French qualified restricted stock awards does not exceed 50% of the annual social security ceiling (€17,676 for 2011 income), the employee contribution is levied at a reduced 2.5% rate.
Taxable income equals the fair market value of the shares at the date of vesting and is subject to tax only at the date of sale at 42.3% (which includes income tax at a rate of 30% and CSG/CRDS and social tax at a combined rate of 12.3%). Alternatively, if more favorable, the taxpayer can elect to have the stock award taxed at the regular progressive rates, plus the CSG/CRDS and social tax. Any additional capital gain resulting from the difference between the sale price and the fair market value at vesting is taxed at a rate of 31.3%, in the same manner as stock options.
New withholding obligation on French-source portion of French qualified gains realized by nonresident taxpayers. Under new Article 182 A of the French Tax Code implemented by the 2010 French Amended Finance Act, the French income tax due on the French-source portion of qualified stock options or qualified RSU gains realized by individuals who are not tax residents in France at the time of the taxable event (that is, the sale of the underlying shares) must be withheld by the entity that pays the cash proceeds from the sale of the shares. The income tax must be withheld at the flat rate applicable to the qualified stock options or qualified RSU gains (18%, 30% or 40% for gains realized in 2011), or at the specific progressive withholding tax rates applicable to compensation income, if the beneficiary has elected to have the gain taxed at the progressive rates of income tax. This new obligation applies to gains realized on the sale of the underlying shares, effective from 1 April 2011.
Capital gains. Capital gains derived from the disposal of shareholdings and real estate are subject to tax in France.
Investments. Capital gains realized by a taxable household on the sale of listed or unlisted shares, bonds or related funds are taxed at a rate of 19%, and are subject to CSG/CRDS and social tax at a combined rate of 12.3%, resulting in a combined total tax rate of 31.3%.
Capital gains derived from sales of interests in money market and bond capitalization funds (a type of mutual fund) are taxable at a rate of 19%, and are subject to CSG/CRDS and social tax, resulting in a combined total tax rate of 31.3%. See Expatriate tax law for information regarding taxpayers qualifying under Article 155B. Real property and shares in real estate companies.
Gains derived from the sale of real property are taxable at a rate of 19%, and are subject to CSG/CRDS and social tax, resulting in a combined total tax rate of 31.3%. Gains are reduced by 10% for each year that the property is held, effective from the 5th year of ownership (this means that no chargeable gain arises with respect to property owned for 15 years or more). The purchase price is increased to take into account purchase expenses and capital improvements.
A standard deduction of €1,000 applies to total taxable capital gains in computing the applicable tax.
Exemptions. Individuals may benefit from a total exemption for gains derived from the sale of a principal private residence.
Deductions and credits
Deductible expenses. Expenses incurred in earning or realizing income are generally deductible from such income, and credits may also be available. The following deductions and credits are specifically allowed:
- Taxpayers may either deduct 10% of net taxable employment income limited to €14,157 (2010 ceiling), as an allowance for unreimbursed business expenses, without providing proof of expenditure, or they may elect to deduct actual expenses and provide a detailed listing.
- Tax credits are granted for investment in specified historical or classified real estate, for investment incurred for rental purposes and for domestic employee expenses up to a maximum of €7,500 (2010).
- A credit is available for qualifying child care expenses (outside the home) equal to 50% of the amount paid, limited to €2,300 per child under the age of seven.
- Tax credits are granted, within certain limits, for charitable donations to recognized charitable institutions.
- School credits are available in the amount of €61 for a child in a college, €153 for a child in a lycée and €183 for a child in higher education.
- Amounts paid for alimony and child support (limited for children over 18 years of age) and for limited dependent parent support are deductible.
- A tax credit is available for investments in the motion picture and fishing industries and for certain other investments.
- A tax credit is granted for mortgage interest paid on or after 6 May 2007 for the acquisition of a French principal residence.
The tax credit is limited to interest paid during the first five years (40% of interest paid in the first year, 20% for the subsequent four years). Interest taken into account is capped at €7,500 per year for a couple (€3,750 for single taxpayers).
This tax credit is no longer available for homes purchased on or after 1 January 2011. Numerous other allowances and deductions may also be available.
Personal deductions and allowances. The family coefficient rules discussed in Rates are used in calculating tax at progressive rates and take into account the size and taxpaying capacity of the household.
Business deductions. In general, deductible expenses for commercial, professional and agricultural activities are similar. They include the following items:
- The cost of materials and stock
- General expenses of a business nature, including personnel expenses, certain taxes, rental and leasing expenses, finance charges and self-employed persons’ social security taxes
- Depreciation expenses (two methods are applicable, straight-line and declining-balance, over the normal life of the asset)
- Provisions for losses and expenses if the accrual method of accounting is used
Rates.
French individual income tax is levied at progressive rates, with a maximum rate of 41% for the 2010 tax year (these are the most recent rates available). Family coefficient rules are used to combine the progressive tax rate with the taxpaying capacity of the household. France has a regime of joint taxation for married couples and individuals who have contracted a civil union (Pacte Civil de Solidarité, or PACs). Income tax is assessed on the combined income of the members of the household including dependents. No option to file separately is available.
Family coefficient system. Under the family coefficient system, the income brackets to which the tax rates apply are determined by dividing taxable income by the number of allowances available to an individual. The final tax liability is then calculated by multiplying the tax computed for one allowance by the number of allowances claimed.
Relief for losses. French taxable income is determined for each category of revenue. Expenses incurred in creating income are deductible from the income produced. The following are deductible losses:
- Certain rental losses not due to interest payments, up to €10,700 per tax household
- Certain professional losses
The general principle is that losses from one category of income may offset profit from other categories and may be carried forward for six years. However, this principle is subject to limitations.
Certain losses may be offset only against income from the same category of income. These include capital losses on quoted stocks and bonds.
Capital losses from the disposal of real estate are final losses and may not be carried forward to offset future capital gains from real estate.
B. Other taxes
Wealth tax. A wealth tax is levied on individuals with total net wealth exceeding €1,300,000.
Inheritance and gift taxes. If a decedent or donor was resident in France, tax is payable on gifts and inheritances of worldwide net assets, unless otherwise provided by an applicable tax treaty. For nonresident decedents or donors, only gifts and inheritances of French assets are taxable, provided the beneficiary is also a nonresident of France.
Surviving partners (spouses or partners in a Civil Union [Pacte Civil de Solidarité, or PACS]) are exempt from inheritance tax. The allowance for parents and children is €159,325. The excess is taxed at rates ranging from 5% to 40%. The marginal tax rate is increased to 45%, effective from 31 July 2011. Surviving brothers and sisters may be exempt from inheritance tax if specific conditions are met. In the absence of these conditions, they may each claim a personal allowance of €15,932 and are taxed at a rate of 35% on inheritances of up to €24,430 and at a rate of 45% on the excess. Other close relatives are taxed at a rate of 55% on the excess over €1,594, and other persons at a rate of 60% on the excess over €1,594. The gift tax rates are generally the same as those for inheritance tax. However, surviving partners (spouses or partners in PACS) benefit from a personal allowance of €80,724 instead of an exemption. The excess is taxed at rates ranging from 5% to 40%. The marginal tax rate is increased to 45%, effective from 31 July 2011. The 50% or 30% tax reduction regarding gifts is abolished, effective from 31 July 2011.
The following items are exempt from inheritance tax:
- Works of art if offered to the state.
- Life insurance contracted by the deceased (subject to certain age conditions). This exemption is limited to €152,500 for each designated beneficiary (exception: full exemption for surviving partners).
- The transfer of companies by death or gift. The transfer is partially exempt from inheritance and gift tax if specific conditions are met (in particular, commitment of the heirs or the donees to retain the shares of the company). A tax reduction of 50% continues to apply in the case of a gift.
To provide relief from double inheritance taxes, France has entered into estate tax treaties with the following countries.
Algeria
Guinea
St. Pierre
Austria
Italy
Miquelon
Bahrain
Kuwait
Saudi Arabia
Belgium
Lebanon
Senegal
Benin
Mali
Spain
Burkina Faso
Mauritania
Sweden
Cameroon
Mayotte
Switzerland
Central African
Monaco
Togo
Republic
Morocco
Tunisia
Congo
New Caledonia
United Arab Emirates
Côte d’Ivoire
Niger
Finland
Oman
United Kingdom
Gabon
Qatar
United States
Germany
C. Social security
Contributions. An individual’s social security taxes are withheld monthly by the employer. French social security tax contributions are due on compensation, including bonuses and benefits in kind, earned from performing an activity in France even if paid from a foreign country. However, this rule may be modified by a social security totalization agreement. The total charge for 2010 is approximately 15% to 23% (depending on retirement fund contributions and level of remuneration) of gross salary for employees, and 35% to 46% for employers. Some of the contributions are levied on wages, up to ceilings of €35,352, €141,408 or €282,816 per year (2011 amounts). However, the sickness contribution (employee’s share, 0.75%; employer’s share, 12.8%), the basic state pension contribution (employee’s share, 0.1%; employer’s share, 1.6%), the family allowance contribution (employer’s share, 5.4%), and the housing aid, old-age, work accident and transportation contributions (employer’s share, approximately 6%) are levied on the employees’ total remuneration.
Social security taxes are independent from CSG and CRDS contributions (see Section A).
Benefits. The following benefits are available to an individual subject to the French social security system:
- Daily compensation in the event of interruption of professional activity
- Full retirement pension (basic state pension and complementary pension cover)
- Family allowance (exempt from income tax)
- Full professional accident coverage
- Partial or total medical expense reimbursement
Totalization agreements. The provisions of the French social tax code apply if work is performed on a regular basis in France, regardless of an employer’s place of residence or the source of payment. A French citizen or resident on foreign assignment outside France may continue to contribute to the French social security system for a limited period under certain conditions.
To provide relief from double social security taxes and to assure benefit coverage, France has entered into totalization agreements with the jurisdictions listed below. The EU social security regulation can usually provide for periods of continued coverage under a home country social security regime for up to five years (with the mutual agreement of the competent authorities of both member states). Agreements with other countries apply for one to five years and periods of continued coverage may be extended with the mutual agreement of both competent authorities.
Algeria
Iceland
Philippines
Andorra
India
Poland
Austria
Ireland
Portugal
Belgium
Isle of Man
Quebec
Benin
Israel
Romania
Bosnia
Italy
St. Pierre
Herzegovina
Japan
Miquelon
Cameroon
Jersey
San Marino
Canada
Korea (South)
Senegal
Cape Verde
Liechtenstein
Chile
Luxembourg
Slovak Republic
Congo
Madagascar
Spain
Cote d’Ivoire
Mali
Sweden
Czech Republic
Mauritania
Switzerland
Denmark
Monaco
Togo
Finland
Montenegro
Tunisia
French Polynesia
Morocco
Turkey
Gabon
Netherlands
United Kingdom
Germany
New Caledonia
United States
Greece
Niger
Yugoslavia*
Guernsey
Norway
* The treaty with the former Yugoslavia applies to Croatia, Macedonia and Slovenia.
Negotiations for a treaty with Australia are being completed, and negotiations for a treaty with China are in progress.
To learn more about the history, culture, economy and other information about France
We have been preparing US income tax returns for US Citizens and permanent residents living in France for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in France and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Indian tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in France, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in France.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email